Ending Up Poor in Retirement
By Paul Vorstadt
For almost 20 years I have been working with clients helping them achieve a successful retirement. Over this period of time I have seen it all, the good, the bad and the downright ugly. Albeit a successful retirement means different things to everyone, it does depend on having assets and income. What kind and how much will differ.
The biggest difference between those who are successful at retirement and those who are not is the acceptance that it takes time to build wealth. Those that do not understand this or do not accept this will typically do 3 things that guarantee being poor in retirement.
Take on as much debt as the banks are willing to give. The banks have lots of money that they are dying to loan you….at the right interest rate of course. Debt as they say is a dirty four letter word. Using debt to push forward purchases of stuff is a sure way to ensure that you keep paying for that stuff over and over again; long past its usefulness. The more debt you have the less ability you have to save. The sooner one realizes that happiness does not come from how much stuff you have the better off you will be.
If there is one thing to be taken away from the market crash of 2008-2009 it’s that at some point the debt always has to be paid.
Start investing too late in life. There is no substitute for time! We all know the power of compounding yet investing/savings is still put off to “next year”. Before you know it you are 50 years old with nothing but debt and what once was some pretty cool stuff. The reason we do this is we think he have lots of time. If you were to think of yourself ten years from now it would be tough to relate to the future you because it seems so far in the future. Take that one step further and try to envision yourself at 65. Now look back ten years and try not to tell me that time has just flown by. Without any emotional attachment to your future self, there is no sense of urgency to start planning and investing. Yet I am willing to bet that the top piece of advice that most retirees would have for their younger selfs would be to start saving earlier.
Expectations that the market will make them rich. This is the same mentality as planning on winning the lottery. Usually this behavior follows that of living on debt and thereby delaying savings which makes people desperate. At this stage clients are living and dying with every tick of the market constantly looking for that one stock or one sector that will put them over the top. What happens is investor’s behavior is guided by the fear of missing out. This leads to chasing performance but actually achieving very little. The chart below from JP Morgan shows the 20 year annualized performance for the average investor at 2.3%.
There is no real secret to achieving financial security in retirement. The sooner one realizes that there are no get rich quick schemes (now or in retirement) the sooner we can start living with the same financial systems our parents and grandparents did. They lived within their means, avoided debt whenever possible, saved for the things the needed, save for the future and invest with a long term discipline.