How I Lost $400,000 And Steps To Avoid The Retirement Mistakes I Made

Out of college I joined a financial services company.  The gig was fabulous.  I was able to pitch to senior executives, run my own projects and develop my business skills.

To match my excitement I purchased a $140,000 condo, a bunch of new clothes and drove around town in a brand new car.

But in this new found independence I ‘forgot’ to invest in my 401k plan.  To be completely honest, after two years of education at a top Boarding School, four years at a top University, and growing up in a loving and supportive family my reaction was:

“Eh, Whatever.”

Stupid decision for a kid right out of college right?

Einstein once called compound interest the eighth wonder of the world.  The reason is because if I had contributed 6% of my salary along with my company match for those three years and never touched it again I would have $400,000 by retirement.  That’s right, $400,000.

It wasn’t a just stupid decision, it was a monumentally stupid one.

I lost close to half a million dollars by being lazy.

 

Retirement Planning for Caregivers

People caring for elderly loved ones often have concerns about their own financial future. In many cases, the caregiver has not only lost income, but is also covering a portion of their loved one’s expenses.

Family caregivers need financial planning advice.

During retirement, you may wish to do things like go on vacation, spend time with friends and see your grandchildren. You’ll likely use some combination of Social Security, Medicare or Medicaid, and savings (perhaps including tax-deductible funds like a 401(k) and/or an IRA) to sustain the lifestyle you had while you were working.

But most people are behind in saving.

This article offers specific strategies to significantly improve your retirement finances. No gimmicks.  No get-rich-quick schemes.  No products to sell.  Just targeted tips that work.

We’ll answer these questions:

  • Where do I stand with retirement planning?
  • What changes can I make?
  • What steps can I take today?

The target audience for this article is anyone looking to alter their retirement picture.  Before we begin let’s go through a brief overview of retirement products.

The product most often associated with retirement finances are:

  • 401k – Company retirement plans; companies often match a % of your contribution
  • Social Security – Government organized retirement plan
  • IRA – Tax deductible retirement plan
  • Mutual Funds – Common investment vehicle for retirement funds
  • Savings – The nickels you put away

The collection of money you have in the above products are your retirement funds.  The purpose of collecting these funds is to sustain your lifestyle when you are no longer working.  In retirement you may wish to:

  • Go on vacation
  • Spend time with friends
  • See your grandchildren
  • Pursue hobbies

What we are considering in this article is how we can adjust the funds in the products listed in the table above to enable you to get the experiences you want out of retirement.

Most people are behind.  We will review strategies to adjust that problem quickly.

 

Where Do I Stand With Retirement Planning?

Attempting to get a clear view of your finances is intimidating.  It’s also easy.  Take 10 minutes right now to use T. Rowe Price’s Retirement Income Calculator.  We’ll use the results in a moment to test the dollar impact of various adjustments to your retirement savings plan.

Retirement Planning Article - Picture #1.jpgThe calculator gathers information from you in four steps:

Step 1: Your age

Retirement Planning Article - Picture #2.jpg (1)Step 2: Enter current and future retirement savings

  • How much you have saved as of today
  • Your current income
  • The percentage of your salary you contribute to retirement funds

Retirement Planning Article - Picture #3.jpgStep 3: Your investment strategy

For this step, use the T. Rowe Price-modeled portfolio, which chooses an asset allocation for you.  (We’re just trying to get a rough idea of your financial picture; we can come back and adjust this later.)

Retirement Planning Article - Picture #4.jpg

Step 4: Your expected age of retirement and Social Security participation

Click “yes” to include Social Security benefits in the calculation.

Retirement Planning Article - Picture #5.jpgNext, you’ll get your results, which identify the retirement income you’re projected to have—and the retirement income you’ll need.  There will likely be a gap.

Retirement Planning Article - Picture #6.jpg

 

 

What Changes Can I Make?

There are four changes you can make to alter your financial future:

Retirement Planning Article - Picture #7.jpgThese aren’t just tweaks.  They’ll change your retirement situation significantly. If you combine a couple of these strategies, you’ll be on your way to fully closing the gap between what you have and what you need.

A few of these options do delay the retirement you’re hoping for.  Your concerns about that are valid, and we’ll address them later.  But first let’s take a close look at each change to get an understanding for its potential financial impact.

1.Delay Retirement

Go back to the final results page of the T. Rowe Price Retirement Income Calculator.

Retirement Planning Article - Picture #8.jpgAt the bottom right-hand corner of the page, add five years to the age at which you plan to begin withdrawing from personal savings. Making this change provided $1,100 more per month to my retirement income.  It narrowed the gap between the money I’m projected to have and what I’ll need by 57 percent.

2. Contribute More

Increase the workplace contributions by 5 to 10 percentage points.  This added $250 a month to my retirement income, and another 13 percent of my gap was chopped off.

Retirement Planning Article - Picture #9.jpgSo far, delaying retirement by 5 years and increasing workplace contribution by 10 percent has closed my retirement income gap by 70 percent.

3. Get A Job in Retirement

Take one of your passions (for example, painting, tutoring or giving tours) and set up a part-time arrangement.  It can provide you with a few hundred or thousand dollars extra each month and give you a great deal of fulfillment. It can even have a profound impact upon your wellbeing.  People who work into retirement keep their minds sharp, continue to grow professionally and stay youthful.

This may go directly against many people’s hopes for retirement.  But before you write off this option, consider some part-time jobs that align with your passions.

If you can get paid for one of your passions, jump on it.

4. Choose a Cheaper Place to Live

This option may not be for everyone, as most people want to retire near family. But if you’re flexible, consider moving to a lower-cost zip code. You could look at small rural areas if you like the outdoors, or a college town for a bit of an urban feel while still keeping expenses relatively low.

Check out Sperling’s Best Places to compare living expenses and home prices in different regions across the country.  Lowering your retirement living expenses by 10 to 20 percent can further narrow any gap between your savings and the money you will need.

 

What Steps Can I Take Today?

The above suggestions are structural adjustments to your financial life.  They make a significant impact, but they also take time to implement.  Below are three actions you can take today.

1. Increase your automatic 401(k) contribution by 2 percent

No budget required.  No major cut in your cash flow.  No consultation with a financial advisor.  Just add 2 percent to the amount you’re putting into retirement savings each time you get paid.

The logic

Everyone can sacrifice 2 percent.  It won’t affect your lifestyle.  You probably won’t even notice the change.  On the upside, it will help close your retirement savings gap.  Two percent per paycheck over a few years can add up to tens of thousands of dollars when you take investment gains into account.

It won’t solve the whole problem, but it will get you on the right track.

Exactly how to do it 

Most employers outsource management of 401(k) plans to outside companies like Vanguard or Fidelity.

Find out from your human resources department who manages your 401(k), and call them.  Ask them to increase your automatic salary contribution amount by 2 percent.

The entire conversation should take less than 10 minutes.  They’ll need to know who you are and confirm that you work at the company.  A few clicks on their end, and you’re done.

2. Pick up the phone and call a family member

Call your son, your brother, your mother—whoever you trust unconditionally.  Tell them you’re thinking about retirement planning and would love to chat with them about it.  They’ll be positive and encouraging.

Catch up on things outside of your finances.  Then hang up.

The logic

The mistake many people make is failing to start a dialogue.  After you call your trusted family member, the initial hump is over.  You’ve done it.  This can have a significant psychological benefit.  You’ll feel that you’ve begun to address the issue.

Exactly how to do it

Dial their number.

3. Write down three jobs you’d do for free in retirement

Only consider activities you’re deeply passionate about.  Reject any that seem OK or even merely good.  Dig deep into your assortment of interests.  Pick things that you’ve touched briefly in the past and loved.  It could be painting, or tutoring, or sailing around the Mediterranean.  Pick anything.

Then identify jobs connected to those activities.  Do people still do them today?  Whittle your list down to three potential jobs (feel free to be abstract here, you just want to get an idea of what options might exist).

Is it possible to do those jobs in retirement?  Can you see yourself doing any of them?  How could you make it work?  Push your imagination.  Get creative.

The logic

Our country’s image of retirement was crafted by advertisers and financial companies.  The purpose of this exercise is to reveal that working part-time during retirement can be fulfilling.  In fact, it may be more fulfilling than not working.

Exactly how to do it

Step 1: Think of your fondest memories

Sit down with a pen and paper and think of your deepest happy memories.  Was it when you were:

  • Studying Russian literature in college?
  • Tutoring low-income children?
  • Learning to dance?

Write these experiences down.  Make the list as long as you want.

Step 2: Translate memories into activities

Identify the underlying activity beneath the experience:

  • Reading and writing about classical literature
  • Teaching
  • Expressing creativity through physical art

Step 3: Identify jobs that match those activities

Make a list of jobs that would allow you to participate in those activities:

  • Become a freelance writer; consult with college kids to edit their papers for a fee
  • Work at a tutoring center, such as Sylvan Learning
  • Teach dance to children; work as an events planner at a dance studio

 

Summary

The idea that 50 percent of Americans are unprepared for retirement and out of options is flat-out wrong.  Four specific strategies can significantly change their future:

  1. Delay retirement
  2. Contribute more
  3. Get a job in retirement
  4. Pursue an alternative living location

Families can also take multiple steps today that will make a difference.

Published: May 7, 2015
By: JP Adams

Subscribe Here! Enter your email and get updates. It's free!

Leave a Reply

Your email address will not be published. Required fields are marked *