When Should I Start Planning for Retirement?

In my 20s and early 30s, my plan was that I would never stop working. I questioned the validity of pursuing my, at the time, rigid idea of “retirement”. What that meant financially was that we were consuming most, if not all, of our income (with the intention of saving, but not doing it). It wasn’t a plan we were following, but more hoping for the best. That behavior continued well into our 40s. Over the years, raising a family, working in an IT career, I started to see the wisdom behind having a plan because “I’ll never stop working” or “it will all work out” are missing an important ingredient: perspective. My message today is about having more say over your time and purpose in the future.

As we mature, we start to crave different things: rest, a return to fun, greater connection, purpose, etc. Not that you can’t have those things all the way along, but anecdotally, it doesn’t seem common. We might see retirement as the time to realize those longings, but we might be sorely disappointed by our ability to “live the dream” if we aren’t intentional. I’ll say this: No plan is a plan; it’s just not likely to be a successful one.

“If you aim at nothing, you will hit it every time.” Zig Ziglar

Another essential point is that retirement means different things to different people. For some, it could mean stopping work altogether. For others, it increasingly means having the freedom to be “work optional” or to put your “work” energy towards something you enjoy more.

One of our jobs as financial planners is to help clients flesh out their dreams, goals, and vision, and partner with them to chart a course that delivers a reasonable chance of success, while helping them adjust along the way as necessary. In this iterative process, intentionality and timing are keys to success. The sooner you start pursuing actions with a purpose, the greater your ability to adapt and have optionality. If you start later, the options are fewer and tend to come with steeper tradeoffs.

I’ll illustrate the power of starting early with this graphic, specific to the power of a dollar invested. The MoneyGuy Show talks about the "Wealth Multiplier" — basically, how much $1 saved at a certain age can grow by retirement (age ~65–67) because of compounding. Let’s say you save $1 in your 20s vs $1 in your 40s. What sort of impact does that have on your dollar? As you can see in the graphic, the comparison is stark. Of course, these numbers are based on historical average market returns, and the future may not go according to plan, but what this illustration shows is that the power of your invested dollar and your margin for error are improved considerably the earlier you start.

I wish I had grabbed hold of this sooner. Shortly after the law creating the Roth IRA was passed, I thought, “That sounds like a good idea! I should probably do that.” Well, it was about 15 years later that I started. Doh!

Here are essential ideas for two major stages of life.

You’re 20ish

The biggest pitfall in this season of life is not using advanced thinking and succumbing to a short-term attitude. This takes maturity, and it doesn’t mean you have to reject fun for dull!

• Lose the YOLO mindset. Take advantage of opportunities, but know that you have time for life to happen. The rest of the principles will ensure you don’t have to wait until 65 for fire-like experiences.

• Get out of the “I’ll never retire” mindset. Realize you are more likely than not to want to slow down someday, or your sense of mission may transform.

• Live on less than you make. This is the simple truth that unlocks flexibility later. Creating margin with increasing income and avoiding lifestyle creep will prove you’re built for a life that isn’t ordinary.

• Start early. Get after it today by forming habits like aggressively paying off or avoiding debt, and setting up automatic savings and investing plans. Remember that $1 today is worth many more dollars later; the earlier you decide to get going, the broader your options become.

Your 40s & 50s

You may think that if you haven’t started planning, it’s too late. One response is to avoid looking at the situation, rather than taking steps to secure your future. Here is a basic framework to follow.

1. Understand your current and future income sources.

2. Figure out your essential fixed and variable living expenses.

3. Determine your fun money (a.k.a. discretionary spending).

4. Calculate how much additional income you need to generate outside of expected retirement sources.

5. Find out the gap between your current savings and what you need to accumulate.

6. Explore options for attaining the target – i.e., how much will it take monthly/annually? That may mean you:

• Unshackle yourself from consumer debt first. There’s no sense earning 8% return on your investments when you’re paying 20% interest on debt or making payments on assets that are going down in value (a.k.a your car with payments)

• Build an emergency fund. Give yourself a buffer for emergencies so you don’t feel like you’re continually going backwards when the unexpected pops up.

• Prioritize saving at least 15%. This may mean you cut out other spending that is less valuable than your future financial security.

• Increase your income. This could mean a spouse who wasn’t working goes back into the workforce, or you finally pursue what will position you to reach the next step on your career path.

• Pay off the mortgage. Eliminating this expense significantly reduces the variable in step #2 above and changes the whole equation.

• Supercharge savings. With some of the above actions completed, more margin means you can invest the monthly or annual dollar amounts needed to get you to your target.

What You Might Not Consider

Here are technical and personal factors to incorporate into your planning:

• Account for the impact of inflation. Prices for everything will rise over the next 30 years, meaning $1M today won’t be worth the same in 30 years. It’s shocking to see how much medical care will cost when I look out 20 years from now!

• Recognize that you may need to adjust your original plans. For example, when it comes to funding your kid’s college, you might want to pay a significant portion of the bill, but it’s important to recognize your limits. Give yourself permission to prioritize your own financial future, especially if one of your values is to avoid depending on your kids financially later on.

• Introduce monkey wrenches. These might not be on your radar. You want to stress test your vision by introducing events that are not entirely within your control. One example is a long-term health care need.

How do we help?

We meet with folks, young and old, who are unsure if they are on track. It’s so much fun to tell them they are on target. Put them at ease. Surprise them with how early they could stop “working” or how much more they could spend & give. They become “work optional”, which can be quite liberating. On the flip side, it’s not much fun to tell clients that the picture is murky or doesn’t look great. The good news is that no matter what age you are, it’s NEVER too late to start planning for whatever that retirement dream looks like.

“Retirement” isn’t just about stopping work; it’s about freedom - the freedom to spend time with your loved ones and the freedom to pursue interests you’ve put on hold. The financial strategies I shared are geared toward thriving. The sooner you start, the more adaptable you will be and thus, the more likely you will reach what you envision.

We have the tools and understanding to do the heavy lifting for you to organize your income sources and assets, detail your various expenses, reveal funding gaps, account for the unexpected, and lay out the advantages and disadvantages of paths to get you where you want to go. We offer hourly consulting or ongoing wealth management to partner with you while you decide on the actions to take. Let’s work together to create a roadmap for your financial future. Contact us today to begin.