Thumb down for these plans.
The following is a guest post from Wayne at Young Family Finance. He writes to help young families with financial challenges, like choosing between daycare and stay at home parenting.
The very fact that you are reading this post suggests that you are ahead of the game. Most individuals or families fail to do any adequate planning for retirement. Unless you are being forced to read this, you are probably thinking about your own retirement.
Insufficient retirement planning is evident not only in the lack of savings of individuals approaching retirement age, but also in the lack of knowledge about fundamentals of finances like a Roth IRA or paying your bills on time. While I could detail my family’s retirement plan for you (yes, I do have one even though I am in my 20′s), sometimes it is better to learn from other people’s mistakes. Instead of offering you advice on what you SHOULD do to prepare, I think it will perform a better service to show you what you should NOT be doing.
Horrible Retirement Plans
1. Procrastination: Procrastinating is not just something that college students do. In fact, history shows that most people fail to start saving for their retirement at a young age. If retirement is 40 years away, why would someone need to start saving now, right? Well, that is the mentality that contributes to this horrible method of retirement planning at least. What young people fail to understand is that with compound interest, someone who starts saving $4,800 per year at age 20 as opposed to starting at age 30, (assuming an 8% annual return) will have over $800,000 more when they retire at age 60. If you are putting off your savings for retirement, you are giving up a lot of money.
2. Life Insurance: Prolonging your retirement planning is all too common of a mistake. Have you ever heard of someone waiting for their parents to die so they can receive an inheritance. While you would think that this is only in really wealthy families or Hollywood, this isn’t the case. Fighting among siblings for an inheritance seems to be increasingly popular in the middle class. Believe it or not, some children are hoping their parents don’t live too long so that they can supplement their retirement income with this money. Before you are too quick to judge, think of how much extra financial security you would have if your parents passed away and left you with a pretty penny. If this is your plan for retirement, you might want to consider two things: 1) many people are outliving their savings so you shouldn’t depend on this money and 2) this takes the responsibility away from you. Retirement planning is not intended to find the easiest way out, but is about discipline and delayed gratification.
3. Government Aid: Similar to number 2, many families are banking (pun intended) on social security. While I believe social security will be around for a long time and isn’t going anywhere anytime soon, this should not be mistaken for a proper retirement plan. Depending on this as your only income in retirement will force you to either live with your children or return to the workforce in order to cover all of your bills. Instead of depending entirely on social security, why not use it as a supplemental income or even better, a safety net? I guarantee that you won’t regret being over-prepared for retirement.
Hopefully you are not following any of these approaches as you prepare for your retirement. Following these plans will not lead to success. It will most likely result in financial disaster. Instead, take action now and be more aggressive in your retirement savings.
What are some bad models of retirement that you have seen?
photo credit: flickr – striatic
{ 48 comments… read them below or add one }
Depending on your government and parents eh? Mom, Dad, and “Big Brother”? That kind of makes me queesy. This is why democracies might one day be in trouble, people who make irrational and illogical decisions get the same vote I do, and they will vote for the government to give them my tax money to fund their retirement because they couldn’t make the right choices for themselves. I become more and more libertarian everyday.
Maybe you out to take a test in order to be able to vote, much like driving. It could be relatively simple but test on some history as well as candidate stances on the issues. Would make for an interesting election, don’t you think?
Oops…”ought to”
As a social studies teacher I have pitched this idea many many times. Unfortunately people think it is unconstitutional. I think there have to be a higher percentage of idiots alive now than ever before due to all our safety nets and this is the end result.
When I read the article title, my first impression was “what is this article about?” However, these are all pretty foul choices, so I agree with you. The difference between starting early versus late in substantial, depending solely on SS is particularly troubling, especially since politicians can’t seem to leave that money alone, and waiting for someone to die for your retirement is downright morbid! Being responsible is infinitely less stressful and is what good conscientious people do.
I agree. I wouldn’t have thought someone could wait for an inheritance until I met distant relatives of my wife. It’s just crazy. I had to work it into a post somewhere.
That’s pretty sad. I guess waiting for an inheritance will work if your parents are very rich. Regular people spend all their money on health care and other regular bills. I am not expecting any inheritance and I’ll tell my kid the same.
Start saving and investing NOW. Wealth compounds and time is the best asset in growing your wealth. Your article is spot on!
Thanks Barb! I definitely see the advantage of starting as early as possible.
Starting early and continued contribution is the key to retirement saving. The stock market is not helping very much over the last few years.
I’ve heard people mention depending on their children to pay for at least part of their retirement. This seems dicey at best, and I can’t imagine most children being pleased to do this. I can’t imagine it in my case.
I agree – my wife and I often joke that we will have kids just so they can take care of us when we are old (we’re currently planning on no kids).
I think children helping out is a valid option. I’m from Asia though and we have different rules when it comes to our parents. My parents can move in with us anytime and we will help as much as we can.
I agree with you about life insurance. I know so many people who just say’ oh well, when I die it will be paid for.” This is such a bad attitude and a waste of money. If you really want to be responsible you have term life insurance plans that you have only until you have enough assets to override them. This is our plan.
It is great to be prepared – as long as it doesn’t lead to a family feud.
I think life insurance is essential to replace your future income. Now that we have a kid, I pay much more attention to life insurance and want to make sure my family will be taken care of if something went wrong.
Surprised it hasn’t been mention as so many people think it might help: the lottery.
Good luck if you are counting on a lottery win to fund retirement!
I buy a lotto once in a while, but I’m not counting on it for retirement. The chances are too low.
ahh.. Great idea – too bad I didn’t think of that when I was writing this article.
It amazes me that people hope to gain form their loss when a loved one dies. Also, planning a retirement around the insecure timing of the loss is irresponsible — who knows how long someone would have to work while they waited for a loved one to “meet their maker”.
The third option is probably ok for people who are retiring right now depending on their circumstances. I’m hoping I will have SS to supplement my retirement income but I don’t want to be dependent on it. I won’t be depending on life insurance either.
I think the SS payment will still be there in 30 years when we retire, but I definitely won’t be depending on it. The payment will probably be less than what is paying out now. Maybe we’ll just use that for our travel fund.
That’s a great point. Yes, I hope it is around in 35 years or so when I can start withdrawing it – I imagine it will be much less like Joe said.
Great post; those three items are all hallmarks of the ‘head in the sand’ approach to personal finance. It doesn’t work with budgeting and it certainly won’t work with retirement!
When I moved to the US someone very smart told me that I need to start saving for my retirement as soon as I get a job. I did not understand it then as back home we rely on the government to pay a pension upon retirement. I am glad I listened though.
Are they still paying pension back home? Can you go back and receive some pension when you retire?
Those are all very good “bad” ideas LOL. I DO know people who are banking on an inheritance – actually TALKING ABOUT WHAT THEY’RE USING THE MONEY FOR! It’s crazy. Not only crass, but irresponsible.
I’m glad I’m not the only one that knows these people…
Very good points! Some people will get a pension, but counting on that pension to be there by the time you retire is not a good idea. A pension fund can go broke if its investments don’t do well. In a bad economy pension funds are at risk.
Great point on the pension! There is a little bit of protection, but a pension is only as healthy as the company funding it.
Most of the people I know personally have done many of the right things. They have done some stupid things along the way, but they put enough away for retirement. In fact many retired early. I try to surround myself with people who are smarter and more successful than myself. I can learn more from them.
That’s a great way to approach life and investment Larry.
Fun post, haha! I think counting on even 8% is too optimistic and one needs to be more aggressive with their savings and plans for the present.
hey I am counting on moving to the country I came from should there be any financial trouble. Cost of living there is lower. We can consider that point too here, isn’t it?
Yeah, that is a good option for me as well. Thailand has public healthcare for everyone and if you are rich, you can buy top of the line healthcare and recovery rooms. Public healthcare has long wait, but for non emergency problems, they do a pretty good job.
I personally know of a person that was counting on getting a large inheritance. The parent passed away, and left a good chunk (not all) of the inheritance to their church. Certainly he ended up with LOT less than he anticipated. Apart from the creepiness of anticipating a relative’s death, not a good idea.
Inheritance should be a bonus and I don’t count on it at all. Actually, I know my parents aren’t going to leave us much.
They are not wealthy.
Agreed. And it definitely is a little creepy.
I’d also add, No Plan at All! I’m guilty of procrastination but have a bit of a plan in place. I’m not entirely banking on my pension, but I am factoring it into the equation.
I think the public pension will definitely get some kind of reform in the future. Too many people are against it.
Well, you just ruined my three plans….I guess I’ll have to start actually planning for real. What a spoiler you are, Wayne!
Good post. Thanks.
hahaha. I am happy to have helped you out.
Thanks.
The Ostrich approach, waiting for someone else to bail you out…that’s the worst. Best for each of us to focus on individual accountability, and realize that the one person who ultimately has your back financially is yourself.
Couldn’t have said it better myself. Thanks Squirrelers.
Bad models? The lottery!
When I first saw the headline for No. 2 Life insurance, I thought you were going to discuss “life insurance policies” rather than inheritance. Both are bad ideas. Since you already talked about inheritance, I’ll talk about life insurance policies.
I’m amazed by how many financial advice books there are out there that boast what great investments whole life / variable life policies are. Then you turn the book over and read that the author was a former life insurance salesman. In general, most life insurance policies (even though they are promoted this way) are bad investments. The fees are beyond anything you’d pay with an IRA or retirement account. I’d like to add to your list that all life insurance policies beyond Term are a terrible retirement plan.
Thinking about life insurance and don’t know where to start? Try IntelliQuote. I work with them and you can get free quotes on rates from several different providers without any pressure to buy. Want to talk to a human? They have agents available to help find the policy that is right for you. Not ready? No pressure. But at least it’s a place to start.
It’s about worst retirement plans but I propose you a good plan – become a chef.
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