Seven Habits of Highly Effective Retirement Plan Participants

 

We might have heard of an old saying and people are salves of their HABITS- If you break the word Remove H - A BIT remains, if you further remove word A, still BIT remains. How often we make New Year resolutions and barely two months in the New Year have we often found ourselves that most of the resolutions were broken and we came back the same old habits of living our lives and hang on to the very same things that we wanted to get rid of. It is no surprise keeping our resolutions requires our unflinching commitment, laser sharp focus, self-discipline, will power and time management skills to overcome the Daemon called “Habits”.  And surprisingly, the same habits cast their ugly shadow on our planning for retirement. Why should you enroll in a retirement plan or contribute to your 401 (K) plan, 403 (b) plans? We often put the most important decision of our lives on backburners and keep delaying the decisions that can make or mar your retirement lifestyles and unknowingly make our lives stressful and force you to work to make living by working in old age. Let me challenge you to think about the following questions:

• Did you know that your retirement can last for 30 years or more? - Thanks to medical research and health care advancements and healthy lifestyles.
• Did you know that a common rule to follow is that a retiree will need up to 80% of his/her annual income today to retire comfortably?
• Did you ever think of how much average benefit amount paid by the social security is $1177? And more importantly, pension plans are gradually but surely going away, so you are left to create your own retirement income destiny.
• Did you ever have an idea of how inflation can substantially reduce the retirement savings you would have at retirement? Since 1925 inflation average is 3% and in future it could be much more.

People built their retirement by building good habits and you can do this as well. As Steven Covey says in his book do the last thing first, and retirement obviously is something we do not think of at an early age. But planning for that last goal in life can pay rich dividends if we plan at an early state in our career. In this context of Aon 401 (K) plan I say that there are seven essential habits that everyone can follow. "What are they?" and I Let me tell you:

1. The first is to start early and if it is too late to start early then just go ahead and start now. Time is your best friend when it comes to saving. Time smooth’s out, investing is ups and downs, and it really lets the market work for you. Saving for retirement requires looking into the future, where you’ll spend the rest of your life. By contributing to your employers 401(K) /403 (b) plans now, you are building income for a comfortable lifestyle in retirement. You can have the peace of mind that comes with knowing your living expenses will always be met.

Let me share an example of saving early: Jennifer puts $1,000 into savings every year from age 20 to age 30, contributing a total of $11,000. She stops, but she doesn’t spend it – she leaves it there. Michael starts at age 30 and saves $1,000 a year until he is 64, contributing a total of $35,000. But guess what. Jennifer’s account is worth more than Michael’s at age 65, even though she put in a lot less. Why? Jennifer started earlier and compound interest has longer to make her money grow to about $180,000. How much more will Jennifer have than Michael? In this example, using a 7% interest rate, Jen has $20,601 more.

2. The next thing to do is to max out your savings rate. Save as much as the IRS allows ($19,500 for under age 50 and those over 50 years of age another $6500 catchup contributions), and if you cannot save that much right now, figure out what you can save, do not just go with the minimum. Know the power of compounding. Albert Einstein once said that the “greatest force in the universe is: compound interest”.

3. Increase your contributions when you can if you got a raise, great, save more. You got a bonus, great, save it. Don't spend it. The more you save now, the more flexibility and choice you'll have later. Ideally, you should save at least 10% of your gross income and those age 50 years and above should think of 20% or more of your gross pay. Obviously, the more you make, the more you have to save in order to keep your lifestyle the same.

4. Pay attention to what is going on. Read your statement, go to the company benefit resources website, and do not get obsessed with what the market does every day. We each have to learn to balance current needs and desired with future needs and desired. Your plan is there to pay for food, shelter and expenses in retirement. It's not about proving that you were some market expert and spent countless hours of researching & investing. Stay fully diversified in different kinds of assets classes and funds.

5. You should review your strategy every year. Retirement investing is not “Set it & forget It” kind of approach. Remember the only thing constant in this universe is constant change. We have to keep pace with change. Markets are changing and evolving and so must our approach to actual market trends. Further, you will get married, you will have kids, and you will change jobs, even your 401(k), 403 (b) changes and will add new choices over time. Every year, when you reenroll in your benefits, take a look at your plan and your strategy.

6. Follow old age wisdom and act your age. When you're young, you can take risks in your investment but you should tone it down as you get older. Evaluate your risk levels to ensure they are in line with your goals. I like this quote from first lady, Barbara Bush: “You just don’t luck into things as much as you’d like to think you do. You build step by step, whether it’s friendships or opportunities.”

There are no such things as Low Hanging fruits or magic wand that would help you help you perform miracles. Start hanging on to what you have in advance age. At the same time don't go too conservative, thinking of safe sanctuary, but add more fixed income securities and get more diversified.

7. Finally important estimate your retirement income. When you get into that home stretch, look at everything. Look at social security, DB plans, Roth and Traditional IRAs and your 401(k) and figure out how much income it will give you and for how long. Figure it out when there's still time to make some smart changes.

So, my esteemed elders, Baby Boomers, and young retirement savers, I am a Baby boomer but many of our colleagues and community members are Gen X, Gen Y and Millenniums. Time is on your side and your money grows tax-deferred until withdrawn, I have had years of experience but you might have more resources, and time on your side than I do. Go to employer’s benefit resources website to learn more.

This quote from Oprah Winfrey: “It’s never too late to live your own dream” underscores that whether you are 18 or 58 it is not too early or too late to start saving for retirement. Start saving early and you reap the benefits of compound interest. For example, a 25-year-old who started investing $200 a month for five years could have accumulated $300,000 by age 65, assuming an 8% annual rate of return. That’s an outlay of only $12,000 over a five-year-period. And this is the most opportune time for you to lay the foundation for safe, secure, happy and fulfilling retirement.

Mahendra S Rathore. MBA, BA( Honors) CFP® CRPC® ChFC® CLU® PMP® CHE® CIMA (Cand)