The Single Biggest Threat To Your Retirement
There’s no shortage of things that can jeopardize your retirement security. Market slumps, job layoffs, medical expenses, an unanticipated spike in inflation, unexpected financial obligations…the list goes on and on. But as scary as these threats may be, they don’t represent the biggest danger to your retirement security. That would be…
Yes, that attractive devil staring back at you in the mirror every morning.
That’s not to say the other hazards I’ve mentioned can’t diminish your retirement prospects. They can. But the danger we ourselves pose to our retirement security can be more insidious if only because we’re not as likely to be aware of it.
So how, exactly, do we undermine our own retirement success? Here are the main ways, followed by advice on how you can limit self-inflicted damage.
>We have a fear of commitment. I’m not talking relationships here, but the difficulty we have in starting to plan for retirement and, more specifically, beginning a savings regimen early on and sticking with it throughout our career. The latest stats from the Bureau of Economic Analysis show that the U.S. savings rate today hovers just below 6% of disposable income, less than half where it stood in the early 1970s. Even among people earning $100,00o or more, only about a third contribute the max to their 401(k). This reluctance to save isn’t totally surprising. After all, our brains are hard-wired for immediate gratification. The sleek car or fancy duds we can have right now are more appealing to us than financial security down the road.
>We’re too emotional. Just when we should be thinking with our heads, we too often go with our guts. Prime example: When the markets are booming, we feel more ebullient, which makes us more apt to underestimate the risk in stocks and load up on them. After a crash, our ebullience turns to gloom, leading us to overestimate the risk we face and flee stocks for the short-term safety of bonds and cash.
>We don’t follow through. Even when we take the time and effort to come up with a coherent strategy, such as building a diversified portfolio of stocks and bonds that jibes with our appetite for risk, we then sabotage our efforts by failing to adhere to our plan. We know that different returns for different asset classes will knock our portfolio’s balance out of whack over time. Still, we don’t bother to periodically rebalance our holdings to bring them back to their proper proportions. Similarly, even if go to the trouble to go to a good online retirement calculator to figure out how much we need to save to have a decent shot at a secure retirement, we often fail to monitor our progress and make periodic adjustments. Retirement is a multi-decade journey. You can’t set your course once and go on autopilot for 30 years.
>We focus on the wrong things. Instead of focusing on the most important aspects of retirement planning—Am I saving enough? Do I have the right mix of stocks and bonds? How should my spouse and I coordinate claiming Social Security to get more in benefits?—we get mired in the weeds, poring over performance charts for the funds that have the highest returns or endlessly researching exotic new investments that purport to provide more diversification in our portfolios. News flash: In the long run, the single most important thing you can do to improve your retirement prospects is save more. If you focus first on that and then turn your attention to building a simple mix of low-cost stock and bond index funds, you’ll have laid the groundwork for a secure retirement.
Fortunately, it’s possible, if not to completely eliminate, then at least mitigate the threat we pose to ourselves when it comes to retirement planning. We do have a natural tendency to spend, but behavioral research shows that we may be more likely to save for the future if we feel some sort of link with our future selves. One way to establish that link is to check out the Face Retirement tool in RDR’s Retirement Toolbox, which uses age-morphing technology to “introduce” you to your future self. Once you’ve made that connection, you may find it easier to set aside resources today to help the you of tomorrow.
Similarly, you can prevent emotions from wreaking havoc with your retirement by adopting a more disciplined approach to planning. Writing down a savings target—10% to 15% is reasonable—will make you more likely to adhere to it than a mere mental note to yourself to try to put some money away. Sign up for your 401(k) plan and elect to have that target percentage deducted from your paycheck, and boom! You’re overcoming both the fear to commit and the failure to follow through. Set an annual date—your birthday, day after Thanksgiving, whenever—to rebalance your retirement portfolio and check your progress with an online retirement planning calculator, and you’re doing an even better job on the follow-through front
The reality is that today the onus is increasingly on you to provide for your security in retirement. So the more you’re able to turn yourself into an asset that enhances your future financial prospects rather than a threat that diminishes them, the more secure and enjoyable a retirement you’re likely to achieve. (9/16/14)
Walter Updegrave is the editor of RealDealRetirement.com. If you have a question on retirement or investing that you would like Walter to answer online, send it to him at email@example.com.