I'm not sure I'm doing enough to prepare for eventually retiring. What should I do to plan ahead?
You may have recently read the first article addressing this question. Let's take the subject a bit further this time. You should be working toward two goals in order to prepare for retirement. They are equally important, but you will notice that one gets talked about much more than the other.
Reducing expenses is one of the two aforementioned goals. To some extent this happens naturally as children mature and become financially independent. But most of the expense reduction usually happens as a result of your determination to eliminate debt in all its manifestations: credit cards, school loans, car financing, and the home mortgage.
Debt reduction is difficult for us culturally, but it is necessary both from a biblical perspective and an economic one. The biblical perspective equates debt with slavery, meaning that the fruit of your labor gets used up for someone else's benefit. The economic angle corroborates this insight when you analyze the long-term effect of borrowing: the lender profits while the borrower loses. This loss is not eliminated until the last payment is made. Being debt-free by retirement age is one of the two cardinal goals.
The second and much better known goal is the production of retirement income. This goal is accomplished through lending and ownership. A certificate of deposit allows you to loan your money through the bank and earn interest in return. It is very difficult to prepare for retirement using lending exclusively, because profits from lending usually stay just ahead of price increases (inflation).
The purchase of rental property, livestock, or a mutual fund gives you ownership that may perform poorly, moderately, or spectacularly. Ownership needs to be incorporated into your investment mix. People with sufficient expertise in a given area may prefer to own something they are more familiar with, such as rental property or collectibles, rather than shares in the stock market.
How would I implement these two goals? First I would stop adding debt, even if it means driving a "clunker" car and shopping for clothes at the local thrift store. This choice may be painful in terms of self-image, but you will experience a new type of freedom with it. Next I would look for ownership opportunities--mutual funds in my case since I have quite a bit of time until retirement, and hopefully a rental property at some point. Finally I would set a target of paying off my 30-year mortgage early by adding at least $100 per month to my payment. These choices have a significant impact on the type of car I drive (110,000 miles at last count) and the home I can afford. (I've worked with several couples that have seen the need to move to a less-expensive home in order to accelerate payments.) But I am willing to give in these areas in exchange for long-term peace of mind.
Expense reduction and income production will together determine your ability to retire. When your income from investment becomes greater than your expenses, you are ready! This process will take many years to accomplish, but if you are on the doorstep of retirement, do not despair. Use the same two goals, and it may take much less time than you thought.