There is nothing more depressing than the topic of retirement planning. Who could possibly want to spend more than a fleeting moment pondering what unpleasant, dreary days, they will suffer through once they approach the end of the road? Life is for the here and now, not for those very distant years that may never arrive. Surely it’s best to live in the moment and let the future take care of itself.
I used to have this view towards life -- overindulgence and reckless behavior were far too easy and enjoyable. What teenager ever avoided smoking because it would be harmful to their health? It was far more important to be cool, and if consumption was good, then over-consumption must be so much better.
How I slowly reached the turning point
At some point near my college graduation, a longer time horizon started to shape my actions. Getting the stuff I wanted in life and being able to do the things I wanted to do was going to take some planning. I had to start taking care of myself -- looking after my personal fitness and eating the proper foods in order to maintain my health (and good looks). Self-improvement wasn’t just a passing fad, but part of a personal responsibility that I owed myself.
Somewhere along the line the “big picture” started to take shape. My career was progressing well and I was earning enough to cover the rent and car payments and more stuff than I really needed. I had signed up for the 401(k) retirement savings account and was contributing to get the maximum from my employer matching contributions. Was this really a retirement plan or just a monthly deduction from my paycheck? I had so much to do right now that saving for some distant and probably unwelcome event was definitely a low priority. In the big picture I was going to make the most out of this time in my life and get the best car or house or vacation that I could afford. But was that everything I wanted out of life or could there be more?
The personal time that I was spending on self-improvement and taking care of myself led to more introspection. Maybe I needed a bigger plan that encompassed my whole life. My family history indicated that I would probably be very active and engaged in life for a very long time. While this job and my current career are interesting I can certainly envision doing more. What are the possibilities and what are the limitations? If I take personal satisfaction from getting more out of each day, how can I leverage that going forward? I need a plan that allows me to continue to grow and do the things I want to do throughout my whole life.
Trading in retirement planning for life planning
For me, life planning gave me the feeling there was something to look forward to after my working years and I wasn't just saving for years of couch dwelling and fading health. If I wanted something more than that, I'd have to start envisioning it and creating a plan now.
If you're ready to shift your thinking from retirement planning to life planning, it's not as complicated as it sounds.
First set the planning horizon. This biological unit has a limited number of trips around the sun. If I get out of college at 25 and have a life average expectancy of living to 85, then I have 60 years to utilize. If I work to 65, I will have 40 years of generating an income followed by 20 of running down my savings. That’s two years of earning for every year of spending. Do I have to save 50% of my earnings? Fortunately not.
The second step is setting the savings rate that will accumulate sufficient savings to fund 20 years of consumption. With average investments and the power of compounding interest, it turns out that I need to save 20% of my salary to fund my retirement. In some 401(k) plans, the employer makes matching contributions to help fund the defined contribution plan. Since my employer is matching retirement savings contributions that drops my required contribution, hopefully, to a more reasonable 15%. The third step is finding the appropriate investments at a reasonable cost. New investment products such as index funds, exchange traded funds (ETFs), and target date funds have revolutionized investing and made it as efficient as internet shopping. Now everyone has access to the best investments at the lowest costs. In three simple steps the plan is complete and I have a plan that will carry me through my income earning years and fund my income spending years.
Now I have a life plan. I know what my earning potential is right now and how I can spread that over my life. I have resources to fund the things that I want to accomplish this year, next year, and as my life plan develops, I will have the resources to do the things I want to do in the future. The empowerment comes from education and planning. Now I have the freedom to pursue my interests.