The last few years have been nail-biting for anyone saving for retirement with investments in the stock market. The Great Recession and continued gloomy outlooks in the media have investors second-guessing their plans to save for the future. Maybe it’s better to spend more money now and avoid the Wall Street industry, which seems to be designed to benefit institutional investors and their own shareholders.
If you ever intend on leaving your day-to-day work behind in favor of spending years without trading your time and effort for income, retirement saving should still be a priority. Put the negativity aside and use this as an opportunity to move forward towards financial independence.
1. Buying stocks when most people are avoiding them could be good timing. Yes, it’s dangerous to think you can time the market. Don’t aim for investing at the market’s bottom, hoping to take advantage of the next bubble, but take a look at stocks when your friends and co-workers are too scared to add to their 401(k) plans. When others are avoiding risk, it’s time to increase your exposure.
Risk in the stock market doesn’t change, but when it appears safer to put money in stocks, more potential investors will buy, boosting the stock values for everyone who was willing to take on risk at the right time. The stock market only appears safer once people have seen the stock market indices increase for some time. By then it’s too late to take advantage of the biggest returns — and if you want to approach the fabled 8 to 10 percent long-term returns of the stock market, you need to be invested when those big increase following declines come around.
2. Any investment is an investment in time. You may be able to make more money, but you can’t make more time. Time is a significant financial advantage. The math behind the concept of compounding returns plays out in such a way that a small investment early in life, invested properly, will grow to a larger value than a larger investment later in life.
Review this table. If you invest $2,000 a year from age 20 through 29 with a 12 percent interest rate, and invest nothing more, by the time you’re 60, the investment has grown to over $1 million. If you wait until you’re 30, and invest $2,000 for the next thirty years, your investment will reach only $540,000. A 12 percent interest might be an aggressive assumption, and your investment is not likely to provide consistent returns year-after year until you take advantage of conservative assets, but the numbers are drastic regardless. This table should be a wake-up call. If you don’t add more to your retirement savings now, you’ll never have the opportunity to catch up.
3. Your actions now will prevent you from being a burden on others in the future. In past centuries, families were often larger. Elderly relatives lived with their children and perhaps their grandchildren, who supported their needs. Today, Social Security and Medicare exist to help the elderly manage their increasing expenses, but the future of government programs that benefit society are uncertain. If you don’t want to be a burden on your children, the best way to prevent needing support later in life is to save as much as possible, as soon as possible.
4. It’s not possible to save too much for retirement. I’m aware that I recently wrote that is possible to save too much money. Embedded in the financial media, there is a strong focus on retirement investing. The focus is so strong that many people can easily forget that life is something to live, not to wait for. You can live your life while saving for retirement, however. There’s a balance you need to find, but retirement saving needs to be made a priority in order to have a somewhat comfortable life when and if you decide to stop working. The question of whether one is saving too much is a luxury you can consider once you’ve saved enough.
5. Write down the expenses you’ll have during retirement. If you’re able to retire young, you’ll want to have money available to find activities to replace your job and enjoy the time you have when you’re still healthy. There may be travel plans you’ve been delaying until you have more time and fewer responsibilities, for example. Only delay what you need to delay, but all that you’d like to do could be expensive, so think about those costs. As you age, your health may deteriorate, as well. Think about the expenses you’ll have when and if you need long-term health care services.
Living — and dying, not to be morbid — is expensive. When you think about those expenses and write them down, the numbers become real. Once you’ve written them down, add 3% for every year between now and your planned retirement date to account for inflation. These are going to be big numbers, and perhaps they will be scary enough to motivate you into saving for retirement immediately. Assume you won’t receive any help from the government or from relatives, consider how much bigger your retirement nest egg needs to grow, and increase your savings appropriately.
The initial motivation can be the most difficult part of starting a plan for long-term saving and investing. The first steps can be difficult, though employers have made it easier by offering 401(k) plans. The default 401(k) options are not enough to dramatically increase the possibility a comfortable retirement, though. You may also need motivation when the stock market crashes and the rest of the country seems to abandon their investments. When people are scared, there may be great opportunities for investing in stocks valued fairly.
There is a lot of public angst against Wall Street today, a system designed to benefit the institutional investors with the most money while taking advantage of small-time individual investors, but until proven otherwise, investing in a broad selection of stocks through an index mutual fund is the best way for most people to grow wealth over a long period of time without taking on the risk of buying businesses outright.
Your biggest ally in building wealth is time, and time is the one thing you can’t control. You can’t buy more time. You can’t trade time with your friends. You can’t find time lying in the street. The best chance you’ve had at increasing wealth is to start planning for the future yesterday, but since that’s no longer an option, you need to start today. If you’ve already begin saving, the best time to increase your savings plan, giving you the boost you may need to become financially independent, is right now.
Published or updated June 28, 2012.