Is Your Retirement Plan A Ticking Time Bomb?

Is Your Retirement Plan
A Ticking Time Bomb?

According to this recent article from Quartz, the world is sitting on a $400 trillion financial time bomb.

From the article:

The World Economic Forum (WEF) predicts that by 2050 the world will face a $400 trillion shortfall (pdf) in retirement savings. (Yes, that’s trillion, with a “T”.) The WEF defines a shortfall as anything less than what’s required to provide 70% of a person’s pre-retirement income via public pensions and private savings.

The US will find itself in the biggest hole, falling $137 trillion short of what’s necessary to fund adequate retirements in 2050. It is followed by China’s $119 trillion shortfall.

The article goes on to compare this problem to climate change. I’ll let you decide whether or not that’s an accurate description.

However, upon reading and thinking about this article a couple of thoughts came to mind:

  • The people I work with have done a good job of diffusing their own retirement time bomb through years (often decades) of preparation, savings, patience and hard work. My clients are clearly above-average, and the credit goes to them for achieving a relatively bomb-proof financial status.
  • Women, in general, are going to have an even tougher time overcoming this scenario. As I’ve written before, women have unique challenges when it comes to planning for their retirement. They live longer, typically work fewer years and earn less pay while working and often assume the role of caregiver for both aging parents and many adult children.
  • As my colleague, John Lohr, recently addressed, we’re all living longer. Babies born today in developed countries have a life expectancy of 100 years of age.
  • These statistics from the WEF are based on 70% of pre-retirement income. This coincides with a widely followed rule of thumb that you’ll only need 70-80% of your earned income in retirement based on the assumption that some of your expenses will change or perhaps go away altogether. But why is this? Why not plan to have the same (or more) income in retirement as you did while you’re working. This is what many of my clients are preparing for in their financial plans.

If, however, you find yourself in the average or below-average category in terms of “time bomb” statistics, here are a couple of recommendations:

  1. Get started. Whether you’re 25 or 55 years old, the sooner you start saving, the more time you have to take advantage of the wonders of compound interest.
  2. Don’t try to make up for lost time by taking a lot of unnecessary risks with your savings and investments. Slow and steady is the strategy to follow here. Be a tortoise; not a hare.
  3. Focus on the things within your control. You can control or influence things like time (and timing) of goals, cash flow (saving vs spending) and risk. Almost everything else is noise which you would do best to ignore.
  4. Have a personal financial plan. Don’t wing it. And regularly review and update your plan to account for new information and changes in your life.
  5. Keep costs low. This can include investment expenses as well as costs like taxes. The less you spend, the more you keep. And the more that can compound over time for your benefit.
  6. Diversify. Don’t put all your eggs in one basket. Let capitalism work for you over time by investing in the entire market.
  7. Manage your cash wisely. Have a lot of cash in a savings account paying you 0.2% interest and also have balances on a credit card charging you 14% interest? Why? And be sure to have an emergency fund for life’s little (and not-so-little) surprises. Don’t create a budget. No one like those. Create a cash management plan instead.

While the list of recommendations above certainly isn’t exhaustive, it will hopefully give you some ideas on how to get started if you haven’t already. And if you’re already on the way to a bomb-proof financial future, perhaps you’ll find an idea or two you can apply to your situation.

Hopefully, you won’t be the victim of a ticking financial time bomb in the future.


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