It’s A Gravity Thing
One undeniable fact of human nature is the desire to keep score, and for many people, wealth is the scoring system used to define our very existence. Wealth means having an abundance, which usually means money and savings (among other things).
Our wealth is not set in stone; throughout our lives, it will be rising, falling, or remaining about the same. Since our life outlook is commonly framed by our financial situation, it’s very encouraging to know that by adding to our wealth, we can vastly improve our lives.
When we wish to retire, we must put our wealth to the test. I compare this situation to standing on the edge of a cliff and throwing a rock over the side.
The Rock Analogy
For most of us, the rock will fall to the ground, just as your savings will become depleted as you age. If you throw the rock up, you delay the time it takes for it to fall, but it still falls to the ground. In both cases, your savings have bought you some time, and your security depends on you not outliving your money.
If you have no retirement savings, you might as well throw the rock straight down over the cliff. You are destined to outlive your savings and lower your standard of living in retirement.
The Balloon Scenario
If you have saved for retirement and spend less than your investments grow, you have effectively tied up your rock to a hot air balloon; it will rise into the air. This scenario allows one to actually improve their standard of living in retirement.
The minimum situation is to watch your savings gradually decline to allow you a long, enjoyable retirement. For some, that will be age 85, others 95, and a few 100. Ideally, we want our rock to at least float even with the cliff, or in a perfect world, have it rise.
This ideal situation doesn’t happen by accident. Just as you can’t overcome the force of gravity, achieving a secure retirement requires knowledge, commitment, wise investments, compound growth, and years of saving.
Read our post about the planning tools available to Canadians – “The Bridge to Freedom: Planning for Retirement”
The Golden Rule for Retirement
Plan Early, Plan Well
Planning for retirement isn’t something you should start thinking about when you’re nearing the end of your career. The earlier you start, the better off you’ll be. This is because of compound growth – the way your investments grow over time. The money you save today will earn interest, and that interest will earn interest, and so on.
The earlier you start, the more time your money has to grow.
Let’s look at an example of compound interest – “What Is Compound Interest? “
Live Below Your Means
This might sound simple, but it’s incredibly effective. Living below your means means spending less than you earn and saving the rest. This habit allows you to build a cushion for the future and invest more in your retirement savings. It’s a small change that can have a big impact over time.
Wise Investments
Not all investments are created equal. It’s essential to diversify your investments – this means spreading your money across different types of investments to reduce risk. Stocks, bonds, mutual funds, and real estate are all options to consider. In Canada, Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs) are excellent tools to help you save for retirement while enjoying tax benefits.
Understand Your Retirement Needs
How much money will you need in retirement? This depends on various factors, including your lifestyle, health care needs, and life expectancy. A common rule of thumb is to aim for 70-80% of your pre-retirement income. However, this can vary, so it’s essential to create a detailed retirement plan that considers your specific needs and goals.
Monitor and Adjust
Your retirement plan is not something you can set and forget. It’s crucial to review your plan regularly and make adjustments as needed. Life changes, and so do financial markets. Regularly reviewing your plan ensures that you stay on track and make any necessary adjustments to stay aligned with your goals.
John’s Journey to Retirement
John, a middle-class worker in Canada, started planning for his retirement in his late 20s. He lived below his means, saving and investing a portion of his income every month. John used RRSPs and TFSAs to maximize his savings and took advantage of employer-matched pension plans.
John also educated himself about different investment options. He diversified his portfolio, investing in a mix of stocks, bonds, and real estate. He monitored his investments regularly and made adjustments when needed.
By the time John reached his 60s, he had a substantial retirement fund. He didn’t have to worry about outliving his savings because he had planned well. John’s story shows that with knowledge, commitment, and wise investments, it’s possible to secure a comfortable retirement.
Harry’s Struggle with Retirement
Unlike John, Harry, another middle-class worker in Canada, didn’t start thinking about retirement until it was almost too late. Harry was a hard worker, but he lived paycheck to paycheck, enjoying life in the moment and rarely thinking about the future. Saving for retirement seemed like something that could wait, so he put it off year after year.
Harry didn’t take advantage of the RRSPs and TFSAs available to him, nor did he contribute much to his employer’s pension plan. He thought he could catch up later when he had more money, but that time never came. Without a clear plan or the discipline to save, Harry’s money was often spent on things he wanted right away rather than being invested for the long term.
As Harry approached his 60s, he started to realize the gravity of his situation. His savings were minimal, and he had no significant investments to fall back on. The rock he had thrown off the cliff was plummeting straight down, and there was no balloon in sight to lift it back up. Harry had no choice but to continue working past the age he had hoped to retire, taking on part-time jobs to make ends meet.
When health issues began to slow him down, Harry found himself struggling to maintain the standard of living he had grown accustomed to. Without sufficient savings, his options were limited. He had to downsize his home, cut back on expenses, and rely on government benefits just to get by. Harry’s story is a cautionary tale about the importance of planning for retirement early and taking action to secure your financial future.
While Harry’s situation was difficult, it served as a reminder to those around him, including his younger coworkers, about the importance of thinking ahead. His experience underscores the reality that failing to prepare for retirement can lead to financial hardship and a significant reduction in quality of life during the later years.
Harry’s struggle highlights the risks of ignoring the golden rule for retirement. Unlike John, who enjoyed the peace of mind that came from careful planning, Harry’s lack of preparation left him facing an uncertain and challenging future.
See David’s post on “Mastering Sensible Living: How to Balance Wants vs. Needs”
Conclusion
The golden rule for retirement is simple but powerful: Plan early, live below your means, make wise investments, understand your needs, and monitor your plan. These steps can help you secure a comfortable and enjoyable retirement, allowing you to live the life you want without the fear of outliving your savings.
Just like the rock tied to a balloon, your retirement savings can rise and provide you with the security and comfort you deserve. Start today, and your future self will thank you.
In my E-books (“Water Barrel” and “The Balance”) I discuss simple methods to live sensibly for today, take charge of your financial affairs, and invest safely for the long term. For more information please visit David Penna Amazon.
Disclaimer for ManageYourMoney.ca
The information provided on ManageYourMoney.ca is intended for educational and informational purposes only. It should not be taken as financial advice. The opinions shared are those of the authors and are meant to encourage sensible financial habits and decision-making. We recommend that you do your own research or consult a certified financial advisor before making any financial or investment decisions. All investments come with risks, and there is no guarantee of success. Past performance is not a reliable indicator of future results. Always consider your personal financial situation and risk tolerance before pursuing any investment opportunities.
As always, we are not a qualified financial advisors. We just relate financial management to our own experience which may not resemble yours at all. Advice is frequently worth exactly what you paid for it. Most of ours came from expensive experiences.
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