In the hyper consumer society we live in today, buy now, pay later has become the norm. Saving enough money for a secure retirement all too often takes a back seat to the immediate gratification of purchasing the shiny object in the window. Practicing the concept of delayed gratification - fuhgeddaboudit.
One day though, perhaps in your 40’s or 50’s most likely, as you take stock of where you are financially, you very well may discover your savings and investments are not even close in terms of what’s needed to fund the lifestyle you desire in retirement. And if you’re like most people that have not saved enough, you may decide to play the catch-up game.
It’s human nature to procrastinate, especially when it comes to saving for retirement. But by not making any sacrifice’s today for a future you desire tomorrow, you end up playing high stakes poker with your retirement security. Below are five reasons why this risky strategy often backfires:
1 - Time is not on your side
Being able to take on more risk with your investments when in your 20’s, 30’s and early 40’s, assuming you work until your mid 60’s - then time IS on your side. Investing is a long-term proposition and with a time horizon of 25+ years before retirement, you’re able to invest more aggressively and potentially receive higher returns over the long run.
It's better late than never to start finally buckling down and begin earnestly saving in your 50’s, yet the problem you face is a shorter time horizon and less ability to take on more risk. As a result, there’s a missed opportunity to potentially earn higher returns which could result in less income than desired at retirement.
2 - Putting it all on black or red
Perhaps the riskiest strategy of all when playing the game of catch-up is attempting to increase your returns exponentially by concentrating your total investment positions in one stock, or one mutual fund or gold, or silver or you name it. You throw the concept of diversifying your portfolio out the window. You double or triple down, make your bets and pray for good luck.
At this point, you’re no longer an investor. You’ve become a speculator/gambler. You could possibly score big, but you’re more likely to lose big. And the obvious problem is that what you’re risking is your future.
3 - The future is unknown
Playing catch-up inherently comes with lots of assumptions - assumptions more often than not you will have zero control over. So banking on the fact that you will continue to earn the income you need, that your health will stay strong right up until retirement, that there will be no curve balls that disrupt your plans, these are plans made on a wing and a prayer.
When developing comprehensive financial plans for clients, we assess all possible outcomes and come up with contingency plans when worse case scenarios unfold. The problem you face when playing catch-up is that usually your assumptions only take into consideration best case scenarios. This is a dangerous proposition often caused by an inability to face reality and course correct.
4 - Decision making becomes constrained
Having the opportunity to make long-term financial decisions is a major ingredient of successful retirement planning. It affords you the luxury to think big and enables you to leverage perhaps one of your greatest assets - time.
On the other hand, if your time horizon for investing is much shorter than is needed, as a result, your options are limited, your decisions are constrained and the odds of reaching your retirement goals are greatly diminished.
5 - Banking on an inheritance
This is perhaps the most common mistake I’ve seen people make that have not saved enough for retirement. Thinking an inheritance will come to the rescue is wishful thinking. Yes, many times an inheritance you expect does come through, yet more times than you can imagine, it does not.
Unless you’re 100% guaranteed that the money you anticipate inheriting will be there, planning on this as your fallback position and using it as an excuse not to save more and spend less could end up wrecking your dreams of retirement.
When developing a financial plan for clients, we’ll usually take their anticipated inheritance and lower that estimate by 50%. Even then I’ll recommend not having their retirement security hinge on this money.
Key point - the sooner you assess where you are today financially, the more time you’ll have to plan accordingly. As the saying goes - just do it!
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