I'm not sure I'm doing enough to prepare for eventually retiring. What should I do to plan ahead?
The ideal goal for your retirement income is to earn as much through your investments as you earned when you were working. But in my experience, a vast majority of people planning for retirement fall short of this goal. What can you do to swing the balance in your favor? Here are the fundamentals.
The 90/10 rule says that 90 percent of a result comes from correct behavior. Only 10 percent comes from what you know about retirement. By way of example, this means that I have more confidence in people of average intelligence retiring well if they demonstrate self-control with their finances. Conversely, I have little hope for brilliant people who do not limit their own spending. When it comes to finance, behavior--rather than intelligence--pays.
I hope you will receive the 90/10 rule in the spirit it is given. It is both an encouragement to those who do not feel well-informed about finance, and a call to action for those who know a lot but do not consistently put it into practice.
The greatest mistake in preparing for retirement is waiting. I cannot help you if you want to wait. I am only here to help you if you believe, as I do, that your moment of decision is right now, and that even as you read this you have already made a choice, to your benefit or detriment.
Now that you are ready to save for retirement, let's talk openly about where the money will come from. It will come from a voluntary reduction in your existing lifestyle.
Regardless of your level of income, if you are not adequately preparing for retirement it is because the funds are being used somewhere else. In order to say "yes" to retirement savings, you will need to say "no" to something else.
How much will you say "no" to? If you are in your early 30s, 6 percent of your income might be enough to save for retirement. If you are in your early 40s, double that number to 12 percent. Make it closer to 24 percent if you are in your early 50s. As you can see, this is a challenge. Fortunately, increased contributions are just one solution. The other solution is to keep working and saving until the savings grow sufficiently. Often this is the best solution for someone on the doorstep of retirement. Instead of becoming despondent about the possibility of retirement, plan a later retirement date and work toward it.
Returning to the 90/10 rule, it is better to begin using a mediocre savings tool now, than to wait for an outstanding investment option to come along. This plays out in life experience: If you begin now and step forward to do something based on the small amount of information you already have, you will soon find yourself learning about how to better prepare. This process does not benefit you until you take the first step, and start saving.