Debt Free

Are you going to be one the estimated 40% of Americans that didn’t quite stash enough away for their retirement years? Although it may seem like retirement is along way off, you should try to make as close as possible. For too many it’s such a long way off because they’ll be one of those 70 somethings staffing their local McDonalds until they drop one day while pulling out an order of fries. 

The reality is that they wanted to retire, but couldn’t quite put away the required nest egg. So, after leaving that position they’d held for the last 35 years (that was then, that scenario would be a little different these days), they found that the social security and meager pension just couldn’t keep them in the style to which they’d become accustomed, so back to work it was.

So, how to avoid a similar fate? Well, funny you asked. First of all, don’t plan on the Social Security system providing any. Security, that is. If we’re lucky, it will only pay out half of what it pays now, after they reduce benefits to stay solvent. It could conceivably be much worse. They’ll probably have to enact a hefty tax hike too, so it’ll be even harder to save the larger nest egg you’ll need. You could be one of those workers that get caught between the current system and the new, semi-privatized system we may see that actually pays a decent rate of return. You’ll be in sort of a government retirement plan purgatory.

The thing is, people in their 20’s and 30’s are going to need a larger retirement nest egg, on average, than those today. Why? Because health care costs are going up like coke into Miss Hilton’s nose, and although health care is expensive, it’s also very effective, and getting more so. That effectiveness is making everyone live longer, and so their retirement funds need to stay around longer to support them. In addition, you chances of meeting a person who actually has one of the old, defined-benefit style pension plans is about are right up there with  smacking a hole in one on that course you won’t be able to afford to play. Lacking a “traditional” pension, most of us will need to make up the difference on our own.

What are the 5 most important things you must do in preparation for your “Years of Paradise”

1 - Start Saving Early – It’s never too early, but it sure as hell can be too late, can’t it? Here’s a little illustration that’s been dredged up again and again, but it’s true. Two people graduate from college at 23 years old. Suzy gets out of NYU, and Mikey snags his degree from UCLA. Suzy’s dad was an accountant, and taught her well. She instantly starts stashing away a nice sized chunk, $200/month, for her retirement. Assuming she sees a 7% investment return, she’ll have $35,481 after the first 10 years. She tires of saving, marries a great investment banker, and stays home to raise the kids (Yeah, I know it’s not politically correct, but that’s what she wanted to do). It matters little, however. That $22,224 will balloon into $309,226 when she’s 65 years old.

Mikey, on the other hand, leaves UCLA with his degree, gets a great job, but wants to travel and party. He neglects saving for retirement, figuring it’s a long way off, so what the hell. After the same 10 years, he decides to get on the stick and puts in the same $200 a month (a bit light for a 32 year old with a great job, but stick with me). We’ll leave aside the whole IRA contribution limits and tax consequences for a second. After 32 years, he turns 65 and takes a peek into his retirement account to discover he’s amassed only $283,040.

2 – Be Consistent – It’s got to be automatic, those retirement contributions. If they’re not, it’s too easy for those little things in life, like sickness and this or that emergency to arise and derail your scheduled donations (to yourself).

3 - Max Out Your Matching – If your employer is kind enough to offer matching, for Christ’s sake, max it out. That’s free money they’re throwing your way! You don’t see that too often. If you do an analysis, you might find that the matching is the only think that makes the 401K a good choice of retirement vehicle (I’d prefer a new 997).

4 – Set Your Retirement Goals – You have to know where you’re going in order to determine the best road to take. It seems common sense, but you’ll have to determine what you’ll need, for how long, and what you’ll feel comfortable with as a reserve. If watching WCW in your Barcalounger is your idea of paradise, you’ll obviously need less than someone who wants to spend a January in Aspen every winter skiing, and March in the Virgin Islands sailing and scuba diving.

5 – Stay Out of Debt – A massive consumer debt load you must service is a sure way to kill a joyous retirement. Try to be debt free upon retirement. In a perfect world, you’ll be completely debt free long before retirement takes hold, but if not, try to reach that plateau before you take the road to retirement paradise.

These five rules for a financially successful retirement are not the only things you need to do in order to prepare for your years in retirement paradise, but they are  keys to retirement success.