What It Takes to Save for Retirement
January 19, 2021 Author: Tess Downing, MBA, CFP®, Complete View Financial
We hear the low percentage of Americans who have saved enough for retirement. Even worse, we hear the high percentage that cannot round up $1,000 for an emergency expense.
This past year has emphasized the challenge as we’ve had to deal with the financial and psychological consequences of Covid-19. We’ve watched people who lost their jobs or businesses struggle for lack of emergency funds or backup. Even those who had the recommended six months of emergency funds have faced difficulties as the pandemic has lasted longer than that.
The CARES Act made it easier to take money out of 401(k)s and IRAs by removing the 10% penalty and giving three years to pay the taxes. That removed the reasons we normally left those funds untouched, so now we’re also entering the territory of having to rebuild the savings we once had.
As we try to do that, three concepts get in the way of saving for retirement and investing smartly:
We’re not content with what we have
A big principle that leads to financial success is to learn how to be satisfied with enough. It feels like human nature has us in the constant pursuit of “more.” If we have “x,” we want “x+1.” Once we have “x+1,” we want “x+3.” It never seems to stop. It’s called “moving the goalposts.” And it has to do with expectations.
If we aren’t clear on what’s important, it’s easy to focus only on increasing our income and never on trying to manage our expectations. If our expectations grow as fast as our income – or even faster than our income – we will never feel that we’ve made any progress. We’ll always want more.
We think investing has to be sexy and complicated
Investing is about the simple stuff. While some investors can make money with complicated instruments and ideas, investing successfully can also result from some rather boring concepts: “Live below your means, save your money, build a diversified low-cost portfolio and be patient.” That may not be intellectually stimulating, but as a foundation, it is powerful. If you then want to add more sophistication, that’s fine. But problems typically arise when you pay too much attention to the complicated stuff and ignore the simple, basic stuff.
We’re not clear on the difference between “rich” and “wealthy”
The easiest way to define the difference is external versus internal – or visible versus invisible. Rich is having enough money to go out and buy stuff. It’s what you see. Wealth, on the other hand, is what you don’t see. It’s the money you haven’t spent yet.
The importance of external and internal may change with the different phases of life. In our twenties, we’re more prone to spend to attract, to be seen, to establish a persona. In our thirties and forties, we spend on family-related needs and wants. But by our fifties and sixties, the invisible (what we have in our bank and brokerage accounts) starts taking on greater importance – and urgency.
But if we wait until then to start saving for retirement, we will have lost the element of time needed for compound interest to play its role. Yet it’s hard to convince a 20-year-old that one day she’ll wish she’d started saving instead of spending.
The role of time is crucial. Very few stories of financial success happen overnight. Among those who are financially successful, the common denominator is likely to be that they made good decisions for a very long time, allowing the years or decades of compound interest to lead to significant results.
That being said, regardless of where you are today, it’s never too late to start. The sooner you get started, the better. And to do that, you need the right motivation.
“Why do you want to invest?”
Personal finance is much more about “personal” than it is about “finance.”
It’s not about how smart you are or where you went to school. It’s not related to how sophisticated you are when it comes to making financial decisions. It’s much more intimate than that.
It’s about deciding how you want to use your money to buy contentment.
Some of the lofty reasons people report about why they invest include things like:
- To give back to the world or the community.
- To leave a legacy for future generations.
- For personal security, so the world feels less unpredictable.
All those reasons are valid, but they’re unlikely to be the reason for deciding not to buy another purse or take another vacation. The motivation will need to be “closer” than that, like how you feel about yourself and your life each day.
“Contentment” could be a good choice of word. Are things going the way you want them to? Do you feel good about yourself? When you wake up each morning, are you pleased to be alive?
And how does money fit into that motivation? You are more likely to answer “yes” to those questions if you have a net worth of $300,000 than $30,000. Or $750,000 and not $75,000. With the larger number, you will be closer to having your retirement fully funded. And you will have more options when it comes to daily decisions. Where can you send your child to school? Can you live in a safe neighborhood? Can you afford to stay and keep your family healthy?
In the end, wealth – the money you haven’t spent yet – is what funds that contentment.
What are the steps to funding contentment?
If you ask yourself the question, “Why am I investing?” and your answer is “To have more money,” “more” is not enough to motivate you.
Instead, name what brings you contentment in the short-term and the long-term. Your vision is like no one else’s.
Once you know that, every decision you make should serve that goal.
To put your vision into action, you will want to identify the short-term expenditures that are priorities for you – those that justify taking funds that could be put into retirement savings and spending them now. In fact, that will be a constant tradeoff, but one that will be made easier if your “why” is clear.
These three questions can help:
- What do you really want to be able to do – for you and your family now … and later?
- How much will it cost realistically to fund those things?
- How long do you have to meet those milestones in your life?
With those answers, you will be ready to develop your retirement plan. And you will have all the motivation you need to make that plan happen. If you think Complete View Financial can help with the process, do call us for an initial consultation.