I have two questions to ask. When do you want to retire? When will you retire?
Dictionary.com defines the word retire as “to withdraw from office, business, or active life, usually because of age.”
Many of us will retire because we have reached an age where working becomes too hard. Many of us will also retire simply because we don’t want to work! We will have worked the majority our life, and when we reach our designated retirement age, it is time for something else. Something like traveling, spending time with family, gardening, volunteering within the community, golf, you name it. The main thing I would hope that you would take from this post is that if you haven’t started thinking about retirement yet, I strongly urge you to start thinking about it. If you have started thinking about retirement, but haven’t taken action, I strongly urge you to start taking action.
I hate to be the bearer of bad news, but retirement takes more work these days than it did for our grandparents and parents. The pension plans our grandparents and parents are familiar with were referred to as “defined benefit plans.” The amount of income you would receive in retirement was determined by a formula. A typical formula looked something like this:
Number of years worked x salary at retirement age x accrual rate= Final accrued amount (can be disbursed monthly or as lump sum, but typically disbursed as a lump sum.)
Today our employer sponsored retirement plans usually take the form of a 401(k). The difference between the 401(k) and the pension plans lies in the fact that with the pension plans, the final amount received in retirement depended on a formula. With the 401(k), the final amount received at the time of retirement depends on investment performance, meaning your contributions to your 401(k) are not guaranteed to increase, and they stand a chance of possibly decreasing. While unlikely to decrease throughout the whole time you are contributing, depressions and recessions can have a huge negative impact on your contributions in a given time frame.
For example, someone who was planning on retiring in 2009 may have had their plans put on hold due to the stock market tanking. According to MSN Money, “Investors in Fidelity Investments' 401(k) plans saw their balances shrink by 27% in 2008, says Fidelity, the nation's largest administrator of retirement plans.” Fidelity is a huge brokerage house, which lends credibility to that statistic being a good sample to gather data from. While not everyone who was investing for retirement saw a 27% loss, most did.
The reason I post the statistic from Fidelity is not to segway into a discussion about investment choices, it is just to further enforce the point that our retirements are more in our hands than they have been before. Although there are certain funds that will make “smart” investment choices for you based on the year or decade you plan on retiring (called target date funds,) it would be prudent to educate yourself on basic investing principles, if you haven’t already.
With this knowledge, you can prepare your portfolio (the combination of stocks, mutual funds, bonds, ETFs, etc. you own) to perform the best during good times, and limit losses during depressions and recessions.
If the things I have mentioned here sound like pig latin, there is a plethora of financial resources you can get your paws on to assist you on your quest for financial literacy. Please e-mail me if I can be of assistance in that.
Plus, when you start talking about the stock market at your next cocktail party, you will more-than-likely be seen as intellectual. This has always puzzled me because we all need to retire someday, right?!