Are you in the retirement planning mainstream? If you are, that likely means that you have done little or nothing to prepare for retirement. If you are a baby boomer in that category, you are certainly not alone. So is it too late to change? I don’t think that it is for most people. But it requires choosing a different retirement path, the one less traveled.
A recent Forbes article makes a critical point. Having a high income by no means translates to having the wealth needed to achieve financial independence. How can this be?
The essential problems with choosing the wrong path toward retirement arise from contemporaneous matching of spending with income. As we grow our families and our incomes, we make the unfortunate decision right then and there to grow our lifestyles. As a result, a minimal net worth at age 25 earning $30,000 becomes an equally minimal net worth at age 50 making $100,000. Sub-consciously or even consciously we say to ourselves and others: “I work hard, I make a good living, so I deserve to live like it now. Everyone else is doing it. I have plenty of time to save.”
Actually, you don’t.
If you think like that, you will have nothing in the retirement plan basket to show for years of earning and spending.
When you reach your baby boomer years and realize that the retirement nest has no eggs in it, you might give up, thinking that matters are hopeless. Instead, you keep spending. That’s the wrong attitude. It’s defeatist and it will lead to a retirement planning failure.
So what are the alternatives that will put on the retirement path less traveled?
First and most obvious, cut recurrent spending. Start with the simple things, some of which we have already done. This can include eliminating or at least scaling back some of your communications costs, e.g., your landline telephone and bloated cell phone plans. The same approach should be taken towards satellite and cable bills. There are plenty of ways to access free online entertainment. To get you started, pay a visit to Clicker, a brand new site that is like the TV Guide of the internet. The potential savings are significant, if you add them up over time.
Second, downsize now rather than later. This is actually a good time to sell (if you are not underwater on your mortgage) because of the low interest rates and the recently extended home buyer tax credit. You don’t need all of that room, I promise. Don’t believe me? Read this story about small house living. Inspiring, isn’t it? The benefit of downsizing now is to free up your home equity to boost your retirement savings.
Third, earn more on your money. Study and learn about investing for retirement. This study can include asset allocation strategies if you are interested or something as basic as selecting a couch potato portfolio. For your active spending accounts, find a local or community bank that pays high interest.
Fourth, plan to maximize your Social Security retirement benefits. Don’t automatically start collecting at age 62. That can be devastatingly short-sighted, particularly considering the impact on spousal and and survivor benefits.
Fifth, identify potential sources of alternative income for now and in retirement. These can include using your creativity to generate income, selling your expertise online, or even online teaching. Making a little extra money on the side can replace a lot of missing retirement savings. For example, assuming a 4% retirement annual withdrawal rate, making just $500 per month in alternative income is the equivalent to having an extra $150,000 in your retirement nest egg. That can really help overcome having traveled down the wrong retirement path earlier in life.
I’m sure you can come up with some other equally good ideas. The key is to identify the retirement planning path you have been on. If it’s the wrong one (the one more traveled), get off it now and begin a new journey toward financial independence.