Retirement Planning in an Uncertain World

This question gets asked all the time on personal finance websites, books, magazines, and talk shows. People begin to look forward to retirement living and they start asking themselves about “the number.” How much should I be saving for retirement?

Here’s the really painful truth. No one can answer that question with any accuracy. No one knows how much you should be saving for retirement because no one is psychic. No one can tell you exactly what the future holds.

The future may hold abundance for the United States compared to the rest of the world. We’re taking incredible steps in a large number of technological areas, from biotechnology to energy. If American scientists and companies are responsible for big technological steps, we could easily enter a golden age very quickly and a rising tide lifts all boats.

We also could stay in the economic doldrums for a very long while. Japan was an economic powerhouse in the 1980s but has essentially been in a 20 year recession.

Those kinds of questions are vital, but so are ones about you. Will you live to be 60 or 100? Will you have good health until near the end of your life or will it be a long and slow decline?

None of these are known. All of these are vital in terms of estimating how much you can save for retirement.

So, what do we know?

Saving more is better than saving less. When in doubt, save more. It’s never going to be a bad thing for your retirement. It will almost without doubt lead to more security and an earlier retirement than saving less. It’s never a wrong move to save more provided you can pay your bills and live with a bit of comfort.

Diversification is always good. Given that the fate of an individual company or city is hard to foretell, it makes sense to invest in as many different things at once as you can. Think of it like betting on a roulette wheel (with better odds than a casino one). Let’s say there’s 36 numbers and 20 of them will double your money while 16 will just lose. Doesn’t it make more sense to put a coin on each of the numbers rather than all your money on one of them?

There’s also tax diversification. Since we don’t necessarily know what tax rates will look like in a few decades, it makes sense to put some money in pre-tax retirement savings (which means you get the tax benefit now) and some of it in post-tax retirement savings (meaning you get the tax benefit later).

The easiest way for most people to do this is to simply put their retirement money into a Target Retirement fund inside of their 401(k) and their Roth IRA.

A job you don’t want to quit is good, too. If your job fills you with misery, you’re going to be looking to retire at the first possible instant, which will really strain your retirement savings. You’re better off working at a job where you’d be happy to stay around so that when it comes time to retire and fortune hasn’t smiled on your retirement savings, you’re not stuck in total misery having to work a few more years.

This is just good life advice. A job you hate drains you and makes the rest of your life less pleasant. An unpleasant life is not worth any salary.

A plan for filling your hours productively after “retirement” is vital. A retirement, particularly at first, should be a time for achieving things you were unable to do when your profession was taking up your time. That might mean some leisure, but it should also involve work that you love. Freelance work can bring in an income. Volunteer work fills your hours without cost and brings benefits to the community. On the other hand, filling your hours with leisure winds up being expensive and sitting at home is about the worst thing you can do for your physical and mental health.

If you have a retirement plan that involves doing something, you’re going to find it much easier to stretch whatever retirement income you have.

So, what can you do to prepare for retirement? Save as much as you can – and if you’re in doubt, save more. Diversify your savings. Have a job you love and don’t want to leave. When you do leave, have a plan for doing something productive. All of those steps will help ensure that your retirement is as protected as possible regardless of what happens.

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