Did you know the language you speak has an impact on your disposition towards saving money and how you make financial decisions?
Part of the challenge we face with saving today for our future self is that in the English language, we speak of the future differently than we do of the present or past. In other words, our future self is different from our present self. This concept was detailed out in a intriguing Ted Talk by Keith Chen titled Could Your Language Affect Your Ability to Save Money?, and helps shed light into this phenomenon.
This language nuance feeds into a number of misconceptions about retirement planning. This article will explore these misconceptions and address different approaches to help you overcome them and set yourself up for a lifestyle that you desire.
#1: I can put off saving for a number of years; it’s just not a priority right now
On the surface, this can be rationalized. As your earnings increase over time, your disposable income also increases, thus your ability to sock more money away into your retirement savings will increase.
This thinking is flawed on a number of levels.
People who earn an increase in their income routinely choose an equally proportionate increase in their spending and lifestyle. Nicer cars, bigger TV’s, more toys, a newer/bigger house in a more expensive neighborhood, the list goes on.
Making matters more challenging is that by forgoing the establishment of the behavior to save a certain % of your income when your earnings are lower, it makes it all the more difficult to establish that behavior later on. There’s always something else that can be enjoyed now.
Equally damaging is the loss of years for your money to grow. Time is the greatest asset for investors, and the real benefit of being an investor is the long term compound rate of return that your money will enjoy if invested in a consistent and disciplined manner over 20-30 years.
Think that a small amount of savings (or additional savings) is pointless? Over a 25 year period, saving an extra $100/week will translate into an additional $400k with an 8% return. Add another 5 years and it’s over $600k. If you were to put off saving for 10 of those years, you’d need to save about $270/week instead of $100/week to hit the same number.
Overcoming this challenge starts with simply being aware of it. Think of where you are today, and think of how it would feel today if you had made a different spending/savings decision 5-10 years ago, and it resulted in you having 30% more money in your retirement account. How would that make you feel?
Saving early translates into your money working for you, instead of later on you having to work for your money.
#2: There’s no sense having a retirement plan when my life is likely to change so much anyway
This is an excuse, not a plan. Everyone’s life changes, and unexpected things, both good and bad, will come up and alter the course of your life. That doesn’t mean you should put off saving and avoid having a plan or a defined set of goals. Doing so just means that you are only thinking of your present self, ignoring what your future self will want or wish you had done.
Retirement planning is an ongoing process, not a one-time event that lays out the exact course of the rest of your life.
A well-constructed plan serves as an invaluable tool to help you navigate the optimal course for your life…….the course that will give you the most options, the best understanding of implications of different choices, and the least of amount of unexpected surprises at critical milestones in your life.
#3: I love what I do, so my plan is to just keep working
First off, that is AWESOME! Many people can’t say that about their career, so you should be commended for developing a career that you love. That concludes the good news.
The notion that you can just continue to work forever and thus not need to save for your retirement ignores a hugely important factor.
Laws, regulations, industries, markets, disruptive technologies……all are subject to or can drive dramatic change to the way things are done. This means that there is no guarantee that your career as you know it today will be the same or even similar in 10 years or 20 years. Think of the world we lived in 10 years ago, and how much things have changed. Imagine what the next 10 years will bring in terms of innovation and change.
You can’t plan your retirement (or non-retirement in this case) around the assumption that things will stay the same. That things will change is perhaps the only certainty that we can count on. You do yourself a disservice and severely limit your options by not saving based on the assumption that you’ll just keep doing what you’re doing because you love it.
Your ability to succeed at your career may also change as a result of physical or mental ailments that become more common as we grow older.
Plan for the fact that life will be disrupted and you’ll be in a far stronger position to adapt and be financially secure.
#4: Maxing out my 401k is sufficient for my retirement savings
Wouldn’t it be great if IRS knew (or cared) what your specific lifestyle and goals looked like? Limits on the amount that can be contribute into retirement accounts apply to everyone, regardless of lifestyle.
Saving the max allowable amount into your 401k (currently $17,500/year) every year for 30 years will yield you a retirement portfolio of around $2.5MM (assuming 8% return and 2% increase in contributions each year). This would be sufficient assets to fund a retirement income of about $100k/year in future dollars. Discounted back to today at a 3% inflation rate equates to a retirement income of about $3,500/month in today’s dollars. And that is pre-tax.
So in addition to this likely being an under-funded retirement portfolio, every single dollar that comes out of your 401k in retirement will be taxed. This means you have a lot of tax risk exposure.
Contributing additional savings into in a diversified set of retirement accounts, including taxable brokerage accounts as well as tax-free Roth accounts, reduces your future tax risk along with increasing your portfolio balance to better support your goals and lifestyle.
Most investors have more options available to them for saving than they take advantage of, so taking the time to understand your options and coming up a plan that utilizes those options and spreads your retirement asset tax base is a critical component of any financial plan.
It’s also one that your future self will thank for you having done.
#5: Since my kids will go to college prior to my retirement, I need to save for that first
Chronologically this is correct, but financially this is a mistake. Saving for and paying for your child(ren)’s college expenses is absolutely a noble goal for which you should be commended.
However, saving for college expenses should not come at the expense of not saving for your own future self. You lose a significant number of years’ worth of compounding returns, and in the end, you end up having to work more for your money than having your money work for you (refer to #1 above).
Perhaps most importantly, you don’t want to put yourself in a position where you are going to be reliant upon your children to take care of you because you failed to take care of yourself first.
#6: An inheritance or financial windfall is going to come my way, that’s my plan
What if it doesn’t? What if it is far less than you thought? Enough said.
Literally everyone has a different view of what their retirement will look like, and the view that many middle-aged Americans now have is quite different than the perspectives of their parents. There’s more focus on living for the now, enjoying the ride, worrying about the future later.
The optimal answer lies in the middle.
At its most fundamental level, Retirement planning is about giving yourself choices and avoiding unexpected or undesirable outcomes.
It’s about delaying some level of gratification by investing for your future self. Along the way, limit your expenditures on the things that you don’t matter much to you, while pursuing your passions and living life to the fullest……
In other words, MAKING LIFE COUNT!