Most Americans are not ready for retirement. Many of us don’t even want to think about it, let alone talk about it or even actually retire. A recent Wells Fargo survey with over a 1,000 participants from within the 25 to 75 age group, found that more Americans (44%) found retirement difficult to talk about than death (38%), politics (35%), religion (32%), taxes (21%), and personal health (20%).
Initially I was wondering whether to talk about retirement issues and retirement planning in my book on Succcess, Significance and Satisfaction for the Baby Boomer generation—my generation. I did not have to strictly address it. However, I asked myself this question:
Is it possible to talk about 3S without talking about retirement planning?
The honest answer was: Not really.
How can anyone talk about Success, Significance and Satisfaction beyond 50 without taking into consideration what happens when a person must—whether by choice or otherwise—retire?
But my book is not about retirement planning. So instead of going into the details of planning, I have addressed the process that each person must take to prepare for the planning.
What keeps us from planning for the future?
Studies show that a lot of people are not touching financial planning because they don’t know where to begin. And in the absence of an understanding of what we may need to plan for, we don’t plan at all.
“People who understand basic concepts
are more likely to do retirement planning.”
My goal is to help people get over this stumbling block. And in the process I found 5 things that people need to understand before they begin planning for their future.
“People who understand basic concepts are more likely to do retirement planning.” According to the National Bureau of Economic Research (NBER) five core concepts add up to financial literacy. They are compound interest, inflation, risk diversification, tax treatment of retirement savings accounts, and employer matching.
- Compound interest
Compound interest is not complicated. Your money in the bank grows compared to money in hand, which does not grow. The implication is that the earlier you begin to save the more you’ll end up saving because what you put in the bank keeps earning interest and then that interest earns more interest on it over time.
The value of money can change over time. What you bought for $10 two years ago, you may not be able to buy today. This matters when you are planning for the future. You cannot expect your monthly cost of living today to remain the same in ten or twenty or thirty years, even if your spending habits remain the same. You need to save more to stay ahead of inflation.
- Risk diversification
This is basically not putting all your eggs in one basket. Spreading your risk has to be done wisely so that whatever happens to some of your investments, there are others which will make up for it. A balanced portfolio of savings takes careful thinking.
- Tax treatment of retirement savings accounts
On some retirement savings accounts, you pay tax on savings at the point of saving. On others, you pay tax at point of withdrawal. Either way, you have to pay taxes, sometime. So depending on your needs and your tax bracket, a little planning forward will help you avoid excessive taxes in retirement and spread the tax payments to make life easier.
- Employer matching
Some organizations have employer matching on retirement savings up to a limit. Not making use of this in retirement savings is like throwing good money away. You wouldn’t throw away hundreds of dollars, would you? If not, get a grip on employer matching and make the best use of it.
Now you are ready for retirement planning
Whether you are 18 or 65, understanding these five concepts would help you make the best of your retirement and other savings.
If you goal is to find 3S—Success, Satisfaction & Significance—beyond 50, you will have to get yourself on a steady footing financially before entering retirement. But that is not all there is to retirement planning. What you do with yourself in retirement is also a key issue. And this has direct implications to a 3S Life.
Share your concerns on retirement planning in the comments. I really look forward to hearing your thoughts.