Retirement can be golden when proper plans are laid

I say this because people who quit work to enjoy their golden years seldom live the lifestyles they would choose unless they have invested substantial thought and action in planning for financial independence.

It’s not through luck that your neighbor was able to quit work at age 60 to travel, golf and learn to juggle. It’s not because of the generosity of the federal government’s Social Security program that your friend’s parents spend summers in Wisconsin and winters in Arizona. It’s probably because early on they identified their goals and worked hard to reach those goals.

Retirement can never be seen as an event isolated from the rest of our financial lives. It is one goal among many. Many of us want to invest for our children’s college education, buy a bigger house, start a business, take a vacation. Retirement must be seen in light of these other issues and ranked accordingly.

For young people (age 22–40) who probably don’t know what their lifestyle (and therefore their need for income) will be at retirement, I recommend investing as much as they can afford to invest, but only after they have established an appropriate cash reserve and have put into place insurance coverages for their property and lives.

For those closer to retirement (age 41–70), a more thorough analysis must be done, using variables such as inflation, rates of return, life expectancy and specific income needs. (I always recommend using historical simulations when projecting investment returns, rather than a flat rate.)

Anyone considering retirement as a goal should defer enough into an employer’s qualified plan to receive any matching contribution available. Beyond that, Roth IRAs should be considered for their ability to generate large sums of tax-free income and for their estate-planning attributes. If there is a need (and resources available) for additional investing, higher contributions to an employer’s plan are appropriate, or investments in a non-qualified account.

I never recommend variable annuities or variable life insurance contracts as retirement vehicles, due to their high selling costs. Fixed annuities and cash-value life insurance with a fixed-income component can be appropriate under some circumstances.

Three factors are in our favor as we make plans to retire comfortably: Time, the stock market and the federal government.

  • If we start early enough, we have plenty of time – perhaps 40 years or more – to accumulate assets for retirement. Therefore we have many years to invest and many years to compound our earnings.
  • Historically the stock market has provided investors with returns substantially higher than the combined effects of taxes and inflation. If we have the risk tolerance and the time, our money can be made to work very hard for us, reducing the necessity to contribute our own capital.
  • George W. and Congress want us to be comfortable in our golden years, so they have provided us with many incentives to save for our own retirement. Historically the law has encouraged employers to establish tax-qualified retirement plans for our benefit. They have given us, as individuals, numerous tax-advantaged opportunities to save and invest for retirement.

It is important for us to think about retirement, and to act. If we’re hoping our children will take care of us, or the government, we’re bound to be sorely disappointed.