The Need For Retirement Planning
While there are some people who never retire, those who simply choose to continue working into advanced age, or those who simply pass away prior to retirement, for the overwhelming majority of people, they do plan on exiting the workforce at some point in their lives.
Retirement need not necessarily mean one completely stops working, but it does involve a substantial reduction in hours worked, where one at least does not work full time anymore. What this means is that one’s earned income is significantly reduced. Although one’s expenses tend to be reduced as well, the reduction in income tends to far exceed the reduction in expenses, leading to a net loss of income.
Without additional income support, it may not even be possible to retire, and still maintain one’s minimal lifestyle standards, but on the other hand it may not be possible to continue working full time either, due to a reduction in one’s employability. With age comes the increased potential for health issues. We may simply may reach a time where we’re unable to maintain the same work pace, especially if we are in a field that is more physically or mentally demanding.
So there is a certain level of uncertainty when we look at our income earning potential in our later years, and while some may resolve to just continue working indefinitely, this may not even be something we will be in a position to choose. Particularly with the greater life expectancy of today, which is expected to only increase over time, one is wise to consider seeking to plan for the day that one either is forced to retire, or even better, is able to retire on one’s own terms.
We have evolved somewhat into a more permissive attitude toward seniors in the workplace, and there is less age discrimination than we used to see not so long ago, and people are less likely to be forced into retirement automatically at a certain age.
This is indeed discrimination as one may be more than capable of handling one’s duties at a certain age, depending on the person, whereas others may be less capable, and this indeed should be decided on a case by case basis, looking at one’s abilities and not just one’s age in deciding these things.
We also tend to be more open toward hiring seniors in new positions after they have reached what has been historically considered retirement age, and these people very often have contributions they can make, their considerable experience may be able to be put to very good use.
So all this may help us manage our income in later years, but it is typically not enough, and we are wise to make an effort to defer some of our present income to retirement.
One’s Retirement Preferences
While many people expect to work longer than has been typically the case in the past, and feel that they won’t be able to retire when they want to, the fact that they may not have executed the proper retirement planning very often contributes to the problem. This is all about balancing the present with the future, and the natural tendency is to prefer the present and forego the future to some degree, but we need to give proper heed to the future as well.
It is only natural to discount future experiences, this is the way economists look at money, and this translates into life experiences as well, and is particularly noteworthy with life experiences actually.
A lot of the credit that gets extended, for instance, is based upon this principle. People will pay a premium to get something now versus having to wait for it, and this premium is expressed by their paying various interest rates. Even credit card interest rates, running as high as 20% or even higher, can be seen as a bargain, that’s how much people tend to discount the future.
Some of this is based upon need, but much of it is due to impatience.
Some people simply cannot save because they are barely making ends meet so to speak, at a very frugal level, just meeting the necessary expenses in other words. The only way these people are going to be able to save is to increase their income.
So we can say that there is a baseline here, one’s minimal financial needs, and one’s frugality does have its limits, and this is where the limit would be. Above this level, we are into the discretionary component of one’s spending, even though a lot of people wouldn’t consider at least some of this to be discretionary as a result of their attitudes.
This is where the component of preference comes in, where one may prefer a certain amount of discretionary spending now over saving it for a future date. These savings may cover a number of events, and typically they involve allowing for discretionary spending at some future point in time, including at retirement.
The balance that needs to be sought here is between one’s present comfort level so to speak, while in the workforce, and one’s future comfort level, after retirement. The future will eventually arrive, or at least we need to proceed as if it will, and we need to account for that future time as well, or we may be sorry we didn’t.
We may have to endure a reduced standard of living at retirement, and many people are fairly comfortable with that, but this reduction is by degree, and one usually does not want to end up going from being comfortable to living in poverty. So additional income sources are very often needed to reduce the decline in one’s living standards and enjoyment of life in retirement, which does require planning.
One’s Capacity To Save For Retirement
For many people, it’s not so much that they don’t have enough money to save for retirement as it is their simply spending too much of their discretionary income instead of saving it. Modern society is barraged with the impulse to spend, and the efforts to convince us to do so are very effective, and we often are convinced that spending on some things which are clearly optional are instead spending out of necessity.
However, one’s capacity does obviously matter as well, how much money we make. The only way to really affect this though is to strive to make more money, and people generally do that already typically, even though it often is to fuel our appetites to spend more now.
We still do want to be aware of the benefit of increasing our income when this is reasonably attainable, when doing so fits within one’s present preferences of comfort. The goal here should not just be to raise one’s standard of living now, although that’s sometimes necessary, it should also be to better fund one’s future, including and perhaps especially in retirement.
One of the things that a lot of people miss is that building wealth can easily be seen as a desirable end in itself, something to be enjoyed with the same zeal as the accumulation of goods. This extends beyond just having more money at one’s disposal, as people do tend to stress about the future and simply reducing these stress levels by accumulating more wealth can make life more enjoyable in itself, both then and now.
Retirement Planning Strategies
It’s never too early to start saving for retirement. The closer one gets, the more one tends to be preoccupied with retirement, and this is quite natural, especially since people to tend to spend a higher proportion of their income earlier in life.
People in their earlier years tend to prefer the present over the future, and may not properly realize that all decisions involving expenses are financial ones, and this even includes things like whether or not to have a family.
These decisions may end up being in line with one’s overall goals, but often times these decisions are made without proper consideration. Later on one may wish they had more foresight, but one cannot go back and do it all over again as one acquires more wisdom in later years, so the time for proper deliberation is always now.
The longer one’s horizon, the more liberal one can be with risk taking, and risks and rewards go hand in hand, and this means that with more time to invest, greater rewards are possible.
Stock market returns demonstrate this very well. If one’s investment horizon was 5 years or less, it wouldn’t be a good idea at all to invest a substantial part of one’s funds in the stock market, due to the risk of selling at a loss.
However, in the long run, these markets have historically provided both extremely reliable and very lucrative returns, and long time horizons move past the shorter term volatility of these investments, and over these longer terms it has always been the case that investments will perform extremely well.
So the longer, the better, as a general rule, and longer means earlier rather than later. As one moves toward retirement though, horizons shorten, and one’s strategy must be adjusted accordingly. This means that a lot of the potentials benefit from retirement savings occurs during the early to mid years, and therefore one must be actively investing during this time frame, in addition to investing in the right things.
Depending on the country you live in, there may be some tax deferral options, where governments provide opportunities for tax savings to encourage people to save for retirement. These involve either postponing paying taxes on contributions until later, preferably when one is retired and in a lower tax bracket typically, or not paying tax on distributions, income earned from investment in other words.
These incentives should inspire people even more to save for retirement, although the most important part is being able and willing to set aside a good proportion of one’s income for the future.
With both the proper mindset and proper planning, and the proper mindset is actually the most important of the two, we can put ourselves in a much better position to enjoy our golden years.