In the world of personal finance, there’s no end to the number of confusing, contradictory, and misleading messages about investing. One site that I generally like but that is also the “poster site” for conflicting investment headlines is MarketWatch.com. It’s common to see one headline proclaiming nothing but upside market potential followed by another imploring investors to run for the exits as fast as they can.
The personal finance topic that runs a close second in the competition to offer the most confusing, contradictory, and misleading messages is retirement planning. There are many dire headlines about our general lack of retirement preparedness, but also quite a few that say we may be over-prepared or that we’ll need less of a nest egg than we may have thought. Which ones should we believe?
Just as former Speaker of the House Tip O’Neill once said, “All politics is local,” retirement planning is “local” as well. In other words, it doesn’t really matter what most people are doing or how well prepared the average person is. What matters is how well prepared we are.
A key step in “localizing” retirement planning is to run some numbers.
The Employee Benefits Research Institute, which conducts one of the longest-running studies on retirement preparedness, has found that those who estimate how much money they are likely to need for their later years tend to save more for retirement than those who haven’t run the numbers. While correlation is not causation, it doesn’t take too much imagination to see that knowing your goal is likely to motivate you to start doing what it takes to achieve that goal.
There are a lot of assumptions that go into retirement planning—rate of return on investments, inflation, and more. It’s far from a perfect science. But going through the exercise, perhaps with multiple calculators, will give you a sense as to whether you’re on track and what else you might need to be doing.
If you’re on the young side and retirement is the furthest thing from your mind, at very least use a broad-brush calculator such as Fidelity’s myPlan Snapshot. And then remember that you’ll be able to hit your target by investing a far smaller monthly amount if you start now than if you wait until later. If you’re older, use a more detailed calculator, like the SMI Retirement Planning Calculator (membership required).
One important factor is to be conservative in choosing an intended retirement date. An increasing number of today’s workers are planning to work beyond the traditional retirement age, either because they realize they don’t have enough saved or because they like what they do for a living. However, a clear lesson from people who are actually retired is that retirement often comes sooner than you think. In many cases, health factors prevent continued employment. Or, age discrimination plays a role. It’s best to plan emotionally to retire later than we may prefer, but to plan financially to retire sooner.
What steps have you taken to “localize” retirement planning?
By Matt Bell
Matt Bell is Sound Mind Investing’s Associate Editor. He is the author of three personal finance books published by NavPress, leads workshops at churches and universities throughout the country, and has been quoted in USA TODAY, U.S. News & World Report, and many other media outlets.