Smart Savings: Staying the Course
In the first two installments of Smart Savings, we covered the first two decades of post-college life -- your 20s and your 30s. We started by laying out how to get started saving for retirement even though 59 1/2 years old may be a long way off. We then took a look at how to fine tune that savings plan to make sure that your savings arrow is headed straight for a retirement bull's eye.
While our goal of this series is to help savers at all levels, we recognize that all not individuals fit into the categories assigned. So if you find yourself reading this article and you're not already saving for retirement, go ahead and head back to our first article and get started!
Similarly, if you are already saving, but have never focused your savings and formalized a plan, then you might benefit from a read through the previous Smart Savings article.
For everyone else, let's talk about how you can make sure that your hard work leads to a good outcome at retirement.
It's a savings marathon
You don't need to be a sports buff to know how much different it is to run a sprint versus a marathon. Sprinters are powerful runners that can deliver amazing speed over short distances, while marathoners are wiry athletes that are able to sustain a brisk pace over a trying 26.2 miles (or more in the case of ultra-marathons!).
When it comes to your retirement, you want to approach it like a marathoner, not a sprinter. But what does this mean?
A savings sprinter reads something in a magazine or newspaper that really makes an impression and they immediately throw themselves into saving for retirement. They alter their lifestyle drastically so that they can save as much as possible and they spend countless hours agonizing over investment choices and short term investment performance. Unfortunately, this massive effort also means that most of these sprinters burn out and either stop saving altogether or save in a sporadic, unfocused way.
Meanwhile, savings marathoners know exactly how long the course is and are prepared to do exactly what's needed -- not slacking, but also not over-extending themselves. These savers are ready to deal with the ups and downs of the road and are willing to stick with it even when it gets tough. For this dedication, savings marathoners will be able to trot into retirement with smiles on their faces and ample funds in their bank account.
But part of successfully running a marathon -- savings or otherwise -- is keeping tabs on your progress and making sure you're staying on track.
Dealing with obstacles
There are any number of obstacles and distractions that a marathoner might run into during a race and managing these and continuing to stay on track are keys to running a good race. It's no different for savers as they make their way towards the finish line of retirement.
In many cases savings obstacles can be anticipated and planned for which makes them easier to handle. A good example is sending your children to college. As a college education continues to gain importance so does the cost of obtaining one, and often times parents shoulder a heavy chunk of this outlay. While it is highly commendable to help finance your child's education, it's important to be smart about it as well.
Starting to save early can be a big help since you'll be able to take advantage of compounding returns just as you are in your retirement funds. It's also important to track down as many possible loans, scholarship, and grant opportunities as you can. The interest rates on most government student loans make it almost uneconomical to not take advantage of them, and that goes double for grants and scholarships. Many universities also offer part-time work opportunities for students which can help defray costs. Only as an absolute last alternative should you cut back your retirement savings in order to pay for your child's education. Trust us on this -- your college educated son or daughter will thank you when you're not asking to move in with them after you retire.
Life being life though, not all obstacles will be as predictable as college tuition. Lost jobs, health problems, and natural disasters are just a few of the possible problems that can sneak up out of nowhere to wreak havoc on both your life and your finances. These events can vary greatly in their severity and it'd be silly to suggest that you should continue saving for retirement through all of them. What is important, though, is making pulling from retirement savings a last resort, and reprioritizing saving for retirement as soon as possible.
In the end, the hope for a perfectly stable life where nothing -- whether anticipated or not -- throws you off your savings course at all will be futile for most people. Reaching your retirement goal will be a combination of planning for what can be planned for and keeping the goal in sight even as you work through unplanned events.
Checking your pace
Staying on course is important, but if you're at a walking pace when you should be at a steady trot then you may also find yourself caught short at retirement.
The solution is to keep track of where you are and where you want to end up. Just because you have a retirement goal doesn't mean that it's written in stone. As you get older you may refine your ideas for how you want to retire. For instance travelling extensively may have appealed to you at one time, but spending as much time as possible around family may later sound like a better idea. Or you may have thought you'd be bored without work during retirement, but now realize that you're looking forward to the unstructured time. These and a countless number of other scenarios could merit an alteration to your retirement goal.
Financial changes may also play a part. A promotion and a big raise may suddenly make it more realistic to set your sights on a retirement that you previously thought would be unattainable. Alternatively, a big decline in the stock market may mean that you'll have to step up your savings to make sure that you still reach your goal. The one caveat that should be noted here is that saving extra after a stock market decline is prudent and could mean that you'll end up at retirement with even more than you hoped, but saving less because of a stock market boom is never a good idea. As the Internet bubble showed, big gains in a short amount of time can disappear very quickly.
Making sure that your investments are in the right areas and are well diversified are also keys to making sure you're paced well for your retirement goal. For most people this can be a daunting process because of the complexity of the financial markets and the sheer number of investment options. Fortunately, this is where Smart401k can help make a saver's life infinitely easier. Our investment advisors help determine the proper allocation for you so that your investments will fit your age as well as your risk tolerance. All you have to do is check in with us periodically and make the changes that we suggest.
So just to recap, here's what you should be focusing on at this point in your savings marathon:
- Run the whole race! Appreciate what you've done already, but keep your eyes on the prize and keep up your savings pace.
- Look ahead and manage obstacles! Everyone's going to face obstacles to their savings goals at some point, so plan ahead as much as you can, and get back on track as soon as possible if you get bumped off course.
- Stay on the right pace! Despite our marathon metaphor, the finish line for retirement doesn't always stay fixed. Periodically revisit your goals and expectations to make sure that you're still on the right pace for the best possible finish.
Keep up the good work!
If you've read this far then hopefully it means that you're already taking plenty of action to get to your retirement goal. So rather than telling you to get into action, we'll just emphasize that you should keep it up! The retirement savings marathon may feel grueling at times, but the security that comes with a fully funded retirement is well worth pushing through even the toughest times.