There is no simpler advice than the advice you give to a college graduate who’s just gotten a decent job: invest, invest, invest in your 401(k). Invest how much? Invest in what? It doesn’t matter. Time is on their side, and compound interest is just waiting in the wings to work magic on their money. All the other details are unimportant; investment allocations can be fixed and amounts can be ratcheted up. The important thing is to start amassing savings.
I lived in this mode for a while, putting as much as I could into my 401(k) but otherwise not thinking about it. But there comes a time when things start to get a little more complicated. You get married, have a kid (or in my case, two) and you start to realize that this money you’re saving is actually going to be used someday. It’s not an abstract concept anymore.
When this happens, you start to ask questions. What kind of person am I? What kind of retirement do I want? When will I retire? These are fun questions to ask, because they lead to shared fantasies about the future. They’re like those workplace bull-sessions where everyone talks about what they’d do if they won the lottery.
My wife and I had this talk, and we spun some fantastic visions of a shared retirement together. Suddenly, I cared a lot about the details of my investments. The previous advice I’d taken from others – just save as much as you can and you’re doing great – no longer worked. What mattered was: could I make my wife and I’s dream a reality?
The problem is, I never worked out the financial details of this plan. I didn’t know how much our life would cost or how much we’d have to save to get there. This led to what I’d call a “scarcity mindset.” I tried to strip our spending down to the smallest level possible and stash away more and more money. I didn’t want to spend a dime now that could be saved for later. I didn’t want to eat out anymore. I didn’t want to put any money into improving our house. For a year or so there, I wasn’t even living in the present: I was living in an imagined future.
As you can imagine, this did not make me popular around the house. Because honestly, what’s more fun than a husband who questions every purchase and talks constantly about a plan to have fun twenty-five years from now?
Here’s the problem: I had a scarcity mindset because I wasn’t willing to do the work to understand what our retirement plans would cost us. I didn’t want to see what kind of investment nest egg I would need. Because answering this question is hard. And more importantly, because I was afraid I would find out that my dreams weren’t feasible.
In other words, I didn’t know our number.
My wife, as always, saved the day. She found a bunch of websites to calculate retirement expenses. She also found some great sites that use statistics to see if your nest egg can “survive” a number of randomly generated and historical periods of performance. It was hard work, and it can never really be complete. You can’t perfectly predict your future needs. And no website can predict the future movements of the stock market.
But we now have our number. We know roughly how much we need to save each month to make our future plans a reality. This has freed me from my scarcity mindset. I no longer need to grab every dollar I see and stuff it in the mattress. I save what we need to save, and the rest we can use to actually enjoy our lives. It took some work, but I know now that it’s possible to live in the future and have some fun today.
Disclaimer: The views expressed are for informational purposes only and are not intended to serve as a forecast, a guarantee of future results, investment recommendations or an offer to buy or sell securities by FutureAdvisor. All expressions of opinion are subject to change without notice in reaction to shifting market, economic, or political conditions. The investment strategies mentioned are not personalized to your financial circumstances or investment objectives, and differences in account size, the timing of transactions and market conditions prevailing at the time of investment may lead to different results. Clients may lose money. Past performance is not indicative of future results. Investments in securities involve the risk of loss. Any tax strategies discussed should not be interpreted as tax advice and do not represent in any manner that the tax consequences detailed will be obtained. Clients should consult with their personal tax advisors regarding the tax consequences of investing.