One of my best friends recently sent me an article from the Wall Street Journal discussing the generation that is about to enter into retirement. The article highlighted how this generation will have an unacceptably high proportion of people who are unable to retire. Following a generation that had guaranteed pensions, this left them with the reassurance that they would someday have one, too. Left ill-prepared for retirement, this generation is likely to work until the day they die or to face the consequences of poverty and dying poor in America.
In order to avoid repeating history, we must first understand it.
Let’s dig in.
Financial Literacy: Educate Yourself
From the article above, they state that 40% of households with people aged 55 to 70 are able to retire at the same lifestyle that are currently accustomed to living. Yikes. The implication here is that people will have to work late into their 60s or even into their 70s.
While a certain amount of pity is warranted, you and I should learn from these mistakes.
Educating yourself is the only way to truly prepare for the future. When the generation mentioned above got caught in between guaranteed (and forced) pensions and transitioned to (voluntary) 401K and 403B plans they knew nothing about, they decided to simply forego investing in these new vehicles.
Retirement seemed too far away to worry about. That was until the day that it arrived.
The lesson here is to do your homework: You should know all of the ins and outs of all of the retirement vehicles that are offered by your employer. Make intentional decisions about investing i the 401K, 403B, or 457 offered by your work place.
Learn the 20% you need to know to accomplish 80% of the results.
Retirement money is untouchable
Many of the aforementioned people highlighted in the Wall Street Journal article dipped into their savings during tough times. Whether it was a divorce, rececssion, or the loss of a job; the retirement account was not considered untouchable.
They paid the fines and tax and started over each time.
Often times, their 401K/403B was used as an emergency fund. This tax-protected space should be considered sacred. It simply cannot be touched. In fact, it is so untouchable it is often protected even if you declared bankruptcy – if it is an ERISA qualified retirement plan.
This also serves to point out the need for a three to six month emergency fund. Three to six months refers to the amount of money it takes to pay your minimum bills to live at your current cost of living.
Given a job loss, death, or some other unexpected expense…the emergency fund will bridge you to the next opportunity to earn income. Hopefully, this would prevent you from ever even being tempted to dip into retirement accounts.
Build your emergency fund first. Then put money towards debt and investing. Finally, recognize that the money put towards these endeavors is untouchable. You should likely sell your car, home, and any other assets before touching your retirement accounts.
Be a little selfish
Have you ever flown on an airplane? You know when they say something like “If the cabin depressurizes, oxygen will fall from the ceiling. Please, put your own oxygen mask on first before helping others”?
I used to think this was selfish advice. Then, I realized that the only way you can really help others is if you help yourself first. If you are dying from oxygen deprivation, then clearly you aren’t going to be of any help to anyone else.
Personal finances work the same way. If you don’t take care of your retirement first you should not be concerned about your kids’ college education. Unfortunately, this is one of the reasons that the aforementioned generation is struggling to retire. They paid for college when they had nothing saved for themselves.
But who do you think will take care of this older generation when they can’t afford to take care of themselves? Those kids that had their college education paid for by their unwealthy parents. Do you think that they will be thankful for their free college education at that point?
My point is this: Take care of yourself first. Once you are in a sufficient place to keep pace with retirement, I encourage you to give and to give generously! In other words, once you see that Plan A – taking care of retirement – is in a good place, then work on Plan B – taking care of others you love.
Learn from the prior generation that left little for their own retirement. Some of it had to do with bad advice, a poor financial education, not having a healthy respect for retirement, and failing to be a little selfish.
Set yourself up for success. It doesn’t have to be complicated! But it does have to be intentional and steady.
Are your parents able to retire? How did they do it? If they can’t, why did they fail? How much do their prior decisions impact your financial burden? Leave a comment below.