Two Lessons I Learned About Retirement Planning

The following post is by MPFJ staff writer Travis.  Travis is a customer blogger for Care One Debt Relief Services, and also appears weekly at Enemy of Debt.  Travis candidly shares his personal journey to pay off $109,000 of credit card debt and the tips he’s learned along the way. As a father and husband he provides a unique perspective on balancing debt, finances, and family.

Retirement Planning. 

Do these words instantly make your eyes glaze over?  For many people, it does.  It’s like that statistics class that you wonder all semester when you’ll ever use the information the instructor is droning on and on about each day.

The thing is, you can’t afford to not pay attention.

During orientation for my first job, I was informed that I could contribute to a 401K plan, and that my employer had matching funds for the first 3%.  Sounded like a great deal, so I started off contributing 2%.  I felt good about myself, I was doing the adult thing and planning for my retirement.  But was I contributing enough to accumulate a big enough nest egg for the retirement I wanted?  Did I even know what that meant?

I didn’t have a clue, and worse yet, I didn’t talk to anyone.

The first time I talked to anyone about my retirement goals was five years into my marriage when my wife was pregnant with our first child.  We visited with our life insurance representative about our changing needs to the imminent addition to our family.  He helped us set some reasonable retirement goals, and a plan of action to achieve them.  I upped our 401K contributions to be inline with our action plan, and figured we were good to go.

I went along like this for several years.  At some point, I thought it would be a good idea to take a closer look at the 401K statements that showed up in my mailbox every three months.  I thought I was being smart by diversifying my contributions across several funds that my employer had available within the 401K such as a Large Company Fund, Small Company Fund, and even an International Fund.  When I took a look at how each fund was performing, I noticed that the fund I had been sinking the majority of my money into was giving me a return of less than half of some of the other funds.

Another mistake that may have cost me tens of thousands of dollars.

Here’s a  simple example to show how much even a small percentage change in your rate of return can affect your investments.  Let’s say that at a person contributes $300 a month from the day he starts his first job at age 22, until the day he retires 40 years later.  Now, let’s say that his investments give him a rate of return of 4% per year, compounded quarterly.

$300 a month for 480 months, rate of growth of 4% compounded quarterly = $353,415.92

What happens if we up the rate of growth a single percent?

$300 a month for 480 months, rate of growth of 5% compounded quarterly = $455,341.69

In our very simple example, that’s a difference of over $100K, or an net increase of close to 29%!!  You can see how paying attention to your investments can dramatically change your financial picture for  retirement.

I quickly called my insurance representative who invited me to pay him a visit to re-evaluate my retirement goals as well as the growth performance of my retirement funds.  He half-jokingly scolded me for not calling him for so long.  But the realization of how I had handled my retirement savings taught me two very important lessons:

Retirement goals are not a one time “set it and forget it” deal:  As you progress throughout life, your goals will change and you need to adjust your retirement planning accordingly.

Review your retirement fund growth periodically:  When you calculate projected retirement savings, you use an estimated average growth rate.  It is essential to check how your funds are doing periodically to see if you need to adjust where your money is invested, or your contributions based upon how your money is growing.

We have had to halt our retirement contributions over the last 4 and a half years while we were enrolled in our debt management program and concentrating on paying off our consumer debt.  With only 4 months to go until we complete our program, it’s time to schedule another appointment to go over our retirement goals, and examine how our money is growing.

We have goals for retirement, and through careful and constant planning we aim to achieve them.

How about you readers, how often do you re-evaluate your retirement goals?  When was the last time you did so?

Image courtesy of hyena reality /