Most people dream of the day where they can hand in their two weeks notice at work, retire and thoroughly enjoy the freedom that comes with it. Out rightly, you’re one of these people, and your ultimate financial goal is to escape the employment rut and fully own your time. While a blissful retirement is definitely exciting, the real question- is, are you making the right financial decisions to get to this point? In my opinion, here are 7 things that hold people back from living their best retirement life!
Reason #1: You Don’t Have A Retirement Plan
The first reason why you may never afford to retire is that you lack a retirement plan. I’m not sure what your perception of retirement is, but I’ll tell you mine. I view retirement as the final chapter of the employment book or the end of a long, tiresome journey in the workforce. Retirement is when, as an employee, you down your work tools and start reaping the fruits of your labour.
As thrilling as it sounds, let’s not forget that life after retirement still requires the capital to support yourself on a monthly basis. Specifically, you’ll need money to cover expenses such as food, health, travelling, and housing. This is where retirement planning comes into play. In simple terms, a retirement plan is a multi-step financial planning process that will ensure you land softly when your retirement comes. A retirement plan helps you peek into your ideal post-retirement future and start making the necessary steps to achieve your income goals. Planning for retirement rigorously is also crucial because it enables you to be realistic on what to expect. For example, do you intend to continue working on personal projects post-retirement or do you wish to travel around the world with your better half? Depending on what your expectations are, you’ll be able to achieve them if you plan well.
With that said, what are some of the steps involved in retirement planning? Typically, retirement planning starts with understanding your time-window. It all narrows down to knowing when you intend to retire, and how much time you have left until retirement. Understanding your time horizon is super-important because it guides you on where to invest your money. If, for example, you’re under 30 and still have over three decades before retirement, you can go for a portfolio that capitalizes on high-risk-high-reward assets. This is because, the more time you have until retirement, the higher risk your portfolio can withstand.
Next, is to realistically determine an estimate of your post-retirement financial needs. One of the best methods to do this is to take your current annual spending and multiply it by 25. The thing is, your portfolio should have enough money to enable you to withdraw 4% from it every year. Also, keep in mind that different retirement accounts are meant to achieve various financial goals; thus, there’s no one-size-fits-all.
Reason #2: You Haven’t Started Investing
Another reason why you may miss your retirement goals is that you haven’t started investing yet. See, one thing I can assure you of is that it’s never too early to start investing in your golden years. Beginning to invest early, let’s say before 35, gives you a huge advantage financially.
One incredible benefit of investing early is that it gives your money enough time to grow. This is made possible by compound interest, which is an interest calculated on the initial principal you save. Indeed, compounding returns can be a good way of earning passive income, since your money gradually multiplies without you having to put in the effort. For this reason, retirement is one of the biggest motivators for investing. The earlier you put your funds in an investment vehicle, the higher your chances are of having a financially secure retirement.
So with that said, what are some profitable investments for your retirement portfolio? The first investment route to take if you’re aiming for a comfortable retirement are index funds. Index funds are an intelligent, risk-averse way of investing in stocks, bonds, and other securities. An index fund is a type of mutual fund that tracks a particular index’s performance. One massive benefit of this type of investment is that it allows you to invest in multiple stocks or bonds, without needing to buy individual stocks or bonds. What happens is that an index fund invests in fractional stocks from various companies tracked by an index. Besides, index funds are low-cost, passive, and their value tends to shoot upwards over time. Other assets to include in your retirement portfolio are rental real estate, pensions, Personal Retirement Accounts, and Defined Contribution Plans (e.g. 401(k).
Reason #3: Your Living Expenses Prevent You From Saving
Are you a habitual over spender? Sorry to spoil your day, but your chances of retiring comfortably are already lower. The thing is, overspending makes it impossible to spare any funds for your retirement account. When your living expenses are too high, saving and investing remain to be a pipe dream. Not only does overspending milk your bank account dry, but it could also heighten your chances of falling deep into debt. Once you start borrowing money to sustain your expensive lifestyle, there’s a high chance that you’ll retire poor.
So, with that said, how can you determine whether you’re spending more than you earn? The first indicator of overspending tendencies is debt. Suppose you’re steeped continuously in multiple forms of debt. In that case, that could be the strongest indicator that you are overstretching your paycheck.
For example, credit card debt is a notorious culprit when it comes to overspending. You can find yourself heading out to the grocery store with the best intention to avoid impulse purchases. But as soon as you set foot in the store, everything begins to look ravishing, and you pull out your credit card and go on a spree. Things can escalate even further if you have your credit card details saved on your online shopping platforms. As convenient as it seems, credit cards will make you easy prey for exceeding your budget and splurging on things you don’t need.
Also, suppose you often find yourself falling short of your saving targets. In that case, you’re probably drowning your income in your living expenses. Maybe you live in an expensive neighborhood, have cars that consume excessive fuel, or you can’t stop yourself from ordering take out. Whatever the reason is, it’s high time you come up with a spending plan that will help you save some money towards your retirement.
Denying yourself $100 worth of eating out every week will culminate into $400 worth of savings every month. This alone has the potential to snowball your retirement savings by a considerable margin. Therefore, if you’ve tried everything and still can’t account for your finances, the last-remaining solution is to stop overspending.
Reason #4: You Carry Too Much Debt
Truth be told, saving for retirement will be difficult if you carry too much debt. Investing in retirement is not a small feat, and it becomes even harder when you are saddled with debt. Whether emerging from medical bills, shopping addiction, student loans, or costly housing plans, debt will drag your retirement plans down.
For this reason, it’s highly advisable that you pay off your high-interest debt before opening a retirement account. Why is this? Well, the thing is, compound interest can work both positively and negatively. In the case of debt, you may end up losing up to 15% of the initial borrowed amount in the form of accumulating interest.
With that said, the most popular strategy for eliminating debt is the avalanche method. This strategy entails paying down your highest interest debts first then moving to the ones with lower rates of interest. Overall, this strategy will save you money in reducing the total amount of interest you would have paid. However, if this method sounds off limits for you, try the snowball method of debt repayment.
This method recommends starting with your smallest debt as you climb to the more expensive ones. The good thing about this strategy is that it helps you clear your debts faster, and makes you feel accomplished as you erase the small debts from your list. When it comes to debt elimination, the secret lies in finding a method that coincides with your finances, personality, and financial goals.
Reason #5: You Easily Succumb To Instant Gratification
To be honest, saving for retirement isn’t meant for people who easily succumb to instant gratification. Retirement planning is a rigorous process that imminently requires you to sacrifice present pleasures for a more generous, long term good. With retirement, the urge for instant gratification intensifies, majorly because the reward seems like a far-off possibility. I mean, it’s laughable to push your desire for a new, fancy car to your older years, right? You want what you want now, regardless of which method you use to acquire it. It turns out, this mentality is a recipe for overspending and getting trapped in debt, which is why you should switch your mindset if you want to achieve your retirement goals.
The first step that you should take towards scrapping off instant gratification is automating your savings. Come up with a financial system where a specific amount of money automatically finds a way to your savings account. This approach should trickle down to your retirement account and other investments account.
The best part is, you can’t spend what you don’t have. By making your retirement goals a priority, you’ll be less inclines to misuse the finances you intended to save towards retirement.
Also, mastering delayed gratification will have a ripple effect on your post-retirement days. The thing is, most retirees are likely to spend more money than they do before leaving the workforce. This is because as age progresses, you’re more likely to incur additional health expenses, which aren’t cheap. For that reason, cultivating financial discipline early will enable you to manage your funds wisely even after you retire.
Reason #6: You Haven’t Pursued Retirement Advice
The thing with retirement planning is that you can’t run it on autopilot. While hiring a financial planner to help you manage your portfolio is a good idea, you also need to get the hang of things. For that reason, start pursuing investment advice as early as yesterday. Having a deep understanding of the retirement planning process will help you make financially sound decisions as you nurture your nest egg. Additionally, getting retirement advice from the right people will help you avoid some common mistakes that people make while planning for retirement.
As to where to obtain retirement advice, your options are limitless. For one-on-one guidance, consider hiring a good financial planner to help you navigate the steep, slippery slopes of investing. You can also follow online resources like books, blogs, and video resources, most of which are absolutely free! Finally, it won’t hurt to bring an app or retirement planning tools on board!
Reason #7: Your Income Is Too Low To Allow For Saving
The last yet crucial reason you won’t be able to afford to retire is that your income is too low to save. Sometimes, you may be the most frugal person on planet earth, yet you still find yourself struggling to spare even pocket change. If you’re in a similar situation, you may need to explore other ways of making money.
Truth is, multiple income sources is all you need to meet your expenses and spare some retirement savings. Over-depending on your monthly salary will only derail your journey to a safe retirement. Besides making you start your retirement savings journey later, low income will significantly undermine the amount of money you’re able to channel towards your retirement accounts.
With this in mind, exploring other money-making options, including passive income, will work magic on your retirement goals. From setting up side hustles, buying cash-producing assets like rental property, or pursuing dividend income through stocks and bonds, start exploring all the possible ways of increasing your cash inflows!
And those are the seven reasons why you will never afford to retire!