We hear on the news and from many other resources about the importance of planning for retirement. Many financial websites include retirement calculators to help us create a saving target based on certain factors such as our age today vs. our planned retirement age, our current expenses vs. expenses in retirement, and the amount we are consistently contributing to retirement savings (if we are contributing, that is). Check out the retirement planning calculators on the Compass Catholic Website: https://compasscatholic.org/calculators/.
These calculations will tell us if our plans are attainable or unrealistic. You may plan to retire at 58, but the calculation may indicate you will have to work until you are 72, based on the amount you are contributing and your retirement budget. If you want to retire earlier, something will have to change. Either you’ll have to ramp up what you’re contributing to your retirement plan or reevaluate the expenses you may have in retirement. These are just numbers at the moment, so you can look at various aspects to be sure your planning is on target. Otherwise, you’ll get to retirement age and find that your plans are totally unrealistic.
Another variable to consider are the rates of return being used in the calculation. Most calculators will base the target amount for saving on rates of return that are deemed to be historically accurate based on market performance for a particular type of investment. If you put into the calculator an investment mix of 60-30-10 (stocks-bonds-cash), it might give you a rate of return of 5-6%.
Stocks are notoriously more volatile than any other type of investment, but people take the risk because the rate of return is better than bonds or cash. Your tolerance for risk is an important area to consider because rates of return on stocks look good on paper, but when the market starts dropping, you can’t panic and sell everything off. Yet, it happens time and time again. People think they can stomach the risk until things start plummeting. Real estate had also typically been a decent investment until these most recent years and seems to be experiencing a painfully slow recovery.
Another factor to consider is the time it takes to recover the losses from these more volatile investments. Many stock market losses and real estate investments may take 10 years or more before the earnings from a down market are restored, and compounding can begin again. Some investments can take such a steep hit that even the principle has to be built up again. Do you have that much time available before your target retirement date to recover those types of losses? And can you handle the volatility?
If you’re in your twenties, it seems reasonable that you can expect to recover those losses and chances are you will earn back your principle and then some before retirement age. In fact, most stockbrokers will probably encourage you to buy more stocks!
However, if you’re in your late forties or early fifties, you want to make sure you have some assets earmarked for retirement that are in an investment much more predictable than the stock market. In the same way that we advise participants in our Navigating Your Finances God’s Way Bible study to have an emergency fund I encourage you to have liquid assets available in your retirement plans if retirement is on your radar in the near future.
While a 60-30-10 mix might be ideal for a twenty-something just starting out, it might not be the best option for those eyeballing retirement in the next few years.
Ultimately it comes down to a comfort level with the more volatile investments, but also other factors, which we will address in the coming weeks such as changes in expenses in retirement and the amount of income needed to support the lifestyle we envision for ourselves.
“The plans of the diligent are sure of profit, but all rash haste leads certainly to poverty.”—Proverbs 21:5