Retirement is ultimately a function of your bank balance, not your age. Not long ago, I came across some statistics which showed that the majority of the US population will either retire broke or still have to work to have a decent retirement.
I don’t know about you, but this isn’t even close to good enough for me, and definitely is not in alignment with my vision of a happy retirement lifestyle.
With the values of 401(k)s slumping and Social Security payments under the spotlight, here are some guidelines to help you navigate the tricky world of retirement planning. The end result is to see your money outliving you, not the other way around. So let’s get on to the six important tips for financial planning, so you’ll be well prepared to be sitting pretty during your retirement years.
1. Take full responsibility for your financial life. Don’t depend on government or your employer for your retirement, those days are long gone. Social Security is (or will be) bankrupt sooner rather than later and if you think your employer is going to take care of you, take a look at this article from the Wall Street Journal. By taking initiative and not playing the victim of a “patch worked” retirement system, you are one step ahead of the pack.
2. Embrace frugality. If you aren’t frugal already, your spending habits need to change whether you like to admit it or not. This is a change in your financial mindset. Changing your mind is the hardest part, but if you don’t do it yourself, change will be forced upon you. The best example of someone who combines frugality and wealth is Warren Buffett. Let’s learn from the example he has set by being more frugal while striving to increase our income and wealth.
3. Become financially skilled. There are courses out there that teach about investing in various asset classes. Some of these courses offer coaches who are experts in their field. Would you rather work with a financial planner, who basically is a henchman for the banks and mutual funds, or a coach who has experience and knowledge in a specific asset class to help you?
There are people just like you who are determining their own financial destiny. The only real difference between you and them, is how you think about money. You have spent most of your life working for the government (taxes) and banks (mortgage, personal loans, car loans), how about making money work for you?
One area I find people to be particularly weak is in the use of credit cards. There are so many easy to get credit cards and incentives to sign up, but people lose a lot of money with improper credit card use. For example, you should never, ever be carrying a balance, except in emergency situations – I’m not talking about a new flatscreen HD-TV or a high heel shopping spree emergency. I mean a real emergency like medical or life event. I don’t advocate using cash only because the rewards credit cards programs are just too great. Using a no annual fee credit card as cash is the way to really take advantage of the rewards programs.
4. Invest for income. This is THE best way to beat inflation, tried and true. You should be playing the stock market, don’t let it play you. Relying on savings in the bank won’t work since the government has printed away the purchasing power of the dollar. Investing in income producing real estate and high dividend yielding stocks from solid companies is a better option.
Major companies have been increasing their dividends at a higher pace than inflation. Reinvesting your dividends every quarter will allow your money to compound quicker. Indeed, there are also some smaller companies that pay monthly dividends, so you can imagine the effect of compounding monthly.
Many multinational companies are now selling at bargain prices. They generate huge cash hoards through operations in fast growing emerging markets. This is often used to increase dividends and stock buybacks. If there was ever a good time to invest, it’s now. Warren Buffett couldn’t have said it better, “be greedy when others are fearful and fearful when others are greedy.”
5. Eliminate all your debt as soon as possible. By the time you retire, none of your income should be going towards debt payments and you should have already learned how to fix bad credit problems from your financial past. This will lift a HUGE burden off your shoulders. The purpose of your retirement income is to fund your living expenses and to allow you to do things you enjoy doing. Why else would you want to retire?
6. Consider buying a smaller house. You will get a lower price for your current home, and the same will apply when you’re looking to buy. With mortgage rates less than 4% and home prices at their current levels, it’s never been cheaper to buy a house. The savings from a smaller purchase can be used to boost your nest egg. As a sweetener, there are some states where taxes are minimal, and are thus prime for retirement lifestyles.
In order to truly take care of yourself and your family for your retirement years, two basic qualities for successful are required: persistence and determination. It all starts with your money mindset, and from there implementing the habits that will allow you to save more while growing your income to be financially secure in your retirement.
FPT Guy is a writer, the owner and managing editor of Financial Planning Tips – (Twitter follow: http://twitter.com/fptguy) – attempting to liven up the topic of personal financial planning – while helping to guide folks to financial security and freedom.