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 / FreeDigitalPhotos.net

Comments

  1. I constantly check my retirement funds to see how well they’re performing. Recently I moved a large chunk into another fund because the one it was in had performed pretty poorly over the last year. The one I moved it into was performing much much better. If I see that a fund isn’t doing as well as I like over at least half a year, I’ll re-evaluate and see what funds might be better. I don’t check it all the time though since the spikes are always alarming!!!
    Christine @ ThePursuitofGreen recently posted…Changing up Phone CarriersMy Profile

    • Great comment, Christine…it’s important to not make “knee jerk” reactions on the performance of a particular fund over short periods of time. If you do, you’ll constantly be switching your funds around. I like to look at the performance over the last 12 months and also only readjust if things seem really out of whack. Thanks for your comment!
      Travis @debtchronicles recently posted…We Doubled Our Net Worth and You Can Too!My Profile

  2. I think am still at that point where my eyes glaze over when the word “retirement” is thrown around. It seems way far into the future. A very erroneous view I admit. That said, I do agree with you about the need for a constant check on the retirement nest-egg and rebalancing it from time to time to take the most advantage of products in the market and evolving financial situations.

    • I know that glazed over feeling, Simon, but the sooner you can unglaze them enough to get started the better….before you know it too many “tomorrows” have past. Sounds like you have the right perspective, you just need to get a little nudge to get started! Thanks for reading!
      Travis @debtchronicles recently posted…We Doubled Our Net Worth and You Can Too!My Profile

    • I constantly kick myself for not knowing in my 20s that retirement didn’t automatically mean 65 (or some other far off age). Most new grads are under the impression that there is an unchangeable path through life so they never bother to figure out that there are absolutely other options available.
      You know the standard drill, graduate (likely with some student debt), partner up with someone, take on a monster mortgage, fill the drive way with a couple of financed cars, add a couple of little dependents to the mix, and bingo you are now trapped working to pay it all off which will likely take until you are 65.
      I only saw the light in the last few years in my 40s and am working to make up for the lost decades when I blindly did what was considered normal. We saved 10-15% for retirement and patted ourselves on the back for being responsible. Then we considered everything else not consumed by the necessities as available to spend on whatever caught our eye. Boy if I could have a do over, I certainly wouldn’t have chosen the house I did and wouldn’t have wasted all that money on all the non-essentials that actually aren’t all that important to us. We just didn’t realize that by spending all the excess we were in fact choosing to delay our retirement by decades. Had somebody said to me at 25, would you prefer to retire at 40 or do you really want to keep spending on restaurants, clothes, entertainment, home decor, not researching purchases or cutting the grocery bill to a sensible level (by meal planning around the sales) etc etc. I know I would have chosen early retirement over a lot of stuff that really isn’t that important to me.
      Since I can’t have a do over all I can do is strive to make the most of every dollar going forward. Our retirement target is now at ages 57/60 rather than as we each reached 65. Not nearly as great as it could have been, but give our late in life revelation it’s the best we can do short of a lottery win or huge inheritance.
      For those who dream of the McMansion, financing a couple of ridiculous vehicles etc etc then by all means dive in and work until you are 65, but do it knowing you had other options and that’s the path you chose. It may be what everyone around you is doing but when was “everybody else was doing it” ever a good excuse for anything?
      Here’s a link to critical reading EVERYONE should be forced to do before any debts are incurred and lifestyles are chosen. It clearly lays out the math to determine how many years of work are requried to retire based on the percentage of income you save. Damn I wish it had been available when I was 20.
      http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/

  3. We have set our retirement goal to have a particular amount of money that will cover our expenses for at least 40 years starting with 3% withdrawals and then adjusting for inflation. With our age, we have reduced risk in our portfolio so that our asset allocation is now 50/50 stocks/bonds, and will remain that way in retirement which we hope to start in 9 years.
    Bryce @ Save and Conquer recently posted…Gas Clothes Dryer RepairMy Profile

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