Saving for Retirement
There is never a better time to start planning for retirement than right now. Time is the most important factor in investing success. Putting off until tomorrow what you could be saving today costs you far more than you think.
By Ann Coleman (TMF AnnC)
October 20, 2000
I turned 50 this month. Wow. A third of my life is over. Guess that makes me an Old Fool.
So Ann, how does it feel to be 50?
Pretty much like it felt to be 49, and a lot smarter than being 25!
Do I really expect to live another 100 years?
Well, with all the big happenings in biotechnology, I wouldn't rule it out completely. But, I'm an optimist, not an idiot, so I wouldn't assign it a very high probability, either. The point is that I'm planning for my retirement as though I will live for a long, long time.
And I don't intend to spend most of that time working, or collecting Social Security. With a little bit of luck and some smart planning, I hope to be able to tell Uncle Sam "No thanks" when Social Security day comes. After all, if you plan to live to 150, it would be rather rude to expect the rest of the country to pick up part of the tab. So, I'm planning for complete financial independence.
Financial independence has such a nice ring to it. Don't you just love that phrase? There are two sides to financial independence. First, you have to have assets that will generate an income stream that will support an acceptable lifestyle, and that will grow to accommodate inflation. Second, you need a lifestyle that will accommodate your potential income.
Matching those two is the part of retirement planning I don't see discussed very often. I ranted about it some last month, back when I was still blissfully in my 40s. The key is to plan ahead: building equity in a home, saving for retirement, and investing those savings responsibly to get the maximum return possible for your risk tolerance. Once that's all underway, start planning very specifically what you want to do with the last half of your life.
Planning for retirement has been a kind of hobby of mine for a while, but I know far too many people who just won't do it. The excuse is always the same. They barely have the money to pay their bills right now, so how could I possibly expect them to put some away for the future? Next comes the sigh. I know, I know, they say. I have to do it, have to cut back, and I will, just as soon as I (here it starts to get different) pay off the credit cards, pay off the car, get the kids through college, get a raise, refinance my mortgage, get back from Hawaii.
They all know better. I know they do. But I'm not sure they know just how much better it is to start now. There will never come a better time to start putting money into a retirement account. That's a fact. Time is the biggest factor in investing success. You don't have to know how to pick the next Cisco Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %>, or save $10,000 a year, or even listen to Fools. Maxing out your 401(k) or a Roth IRA (or, better, both), investing in a simple index fund, and time are all it takes to build a decent nest egg.
Here's why: Jack invests $2,000 a year for 10 years and then coasts -- he doesn't put in another dime, just lets his nest egg grow at the same rate as the market (11%). After 20 years of coasting (30 years total) Jack will have $299,296.06 in his account. A nice nest egg, considering he only contributed $20,000 out of his pocket.
Compare that to Jill, who does nothing for 10 years then suddenly realizes that time's a wastin'. She invests $2,000 every year for 20 years. (No coasting for Jill, she has to make up for lost time!) Jill puts in $40,000 out of pocket, and at the end of 20 years she has a grand total of... $142,530.29? That's right, Jill invested twice as much and ended up with an account less than half as big as Jack's. During the entire time she was putting away $2,000 a year, Jack was contributing nothing because he already had his stash! Jack gets 20 contribution-free years, Jill gets 10. That hardly seems fair, but Time has never been much concerned with fairness.
(If you are wondering what Jack would have if he hadn't decided to coast, it would be the more impressive sum of $441,826.35 at the end of 30 years.)
Our examples above might not support you in quite the style to which you want to become accustomed -- that requires a bit more planning, and either higher savings or higher returns -- but even modest savings, market-matching returns, and time will go a long way toward a retirement income that can afford chunk light tuna in spring water rather than Friskies.
If you need some help getting started or are looking for advice on how to maximize those retirement returns (lobster instead of tuna, anyone?), The Motley Fool has put together an interactive Roadmap to Retirement Online Seminar that takes you through the steps of retirement planning and portfolio building. I haven't seen the course materials yet, but the other seminars we've put on have been very well received, and the interactivity is wonderful for getting you inspired to take stock of where you are and where you're going. Just spending a month thinking about your retirement plan several times a week is pretty valuable!
Fool on and prosper!
