Part 2: Setting Your Retirement Plan
Compounding Your Time
As Part 1 mentioned, one of the best things you can do to your retirement plan is to start early. The advantage of time and compounding can be difficult to understand, but the benefits are easy to see. Compounding is not just your money earning interest; it’s the interest you’ve earned that also earns interest.
Let’s start at 25 years old, save $5,000 (total) and make 7%. Because of the power of compounding (at 7% $5,000 becomes $5,350 in a year and $5,725 a year after), your money will double every 10 years. $5,000 can become $10,000, $10,000 can become $20,000, and $20,000 can become $40,000 — without you saving another penny. The advantage of starting early is that your money has plenty of time to work for you.
If you weren’t able to start at age 25, don’t worry — it’s never too late to start. Every dollar saved is one dollar better off when you file for retirement. It can be the emergency fund to cover unforeseen disasters after you’ve started collecting your pension. It can be used to pay for college for grandkids. It can be used for vacations or fun “splurges.” But it will only be there if you save it.
Keep in mind that stock and bond markets do not go straight up. We are looking for an average; it isn’t 7% every year, but hopefully a series of returns (12%, 9%, -10%, 11%, and 15%) that makes a 7% average. Don’t get frustrated by downswings, and don’t get ecstatic by upswings. Stay calm, stay patient.
Planning Your Retirement
Getting from 25 to 65 is a long journey. It will be filled with joy and sorrow, but the most important thing to do is continue working toward the goal of being prepared for retirement. Having a pension sets you up better than most individuals today; your pension will provide a better income than most could enjoy. But you shouldn’t depend on just one income. As a famous and oft-repeated quote says, retirement is a three-legged stool. A pension is one leg, Social Security can provide another, but personal savings is a must.
No one has ever complained about having too much money in retirement. Setting aside 1% (or more) into a retirement account adds up and will provide a nice base to supplement your retirement when the day finally comes. And on your way to that retirement, you should have three goals on that bucket list:
1. Pay off the house
2. Pay off the car
3. Get the kids off the payroll
In retirement, cash is king. Your goal should be to limit or, ideally, eliminate things that tug at your cash flow. While you’re working, having to come up with some extra cash is possible. After retirement, it gets harder to keep up with those standard payments. Life happens. Health fails.
One last thing to remember: As you start your retirement trek, things move slowly. Often, participants have complained that “I didn’t make very much this year” despite being up a considerable percentage. When an account is new, with $1,000, a 10% return is “only” $100.
“It’s only $100.”
Yes, but what if it was $100,000 growing to $110,000? It’s the same percentage growth, just a bigger starting value. Have patience, and you will be rewarded.
Questions about your current retirement plan, or interested in learning more? Contact Mike Wilcher, Local 25 plan administrator, at 309-794-1170 x242.