The biggest financial finish line in the majority of people’s lives is retirement. Researchers have poured years into studying how to get people to actually take the steps to prepare for retirement because not enough people are doing so. The definition of retirement is to leave one’s job and cease working. Quitting work is the easy part of retirement. The hard part is being financially prepared to no longer have paychecks coming. Everyone is looking for a magic bullet to retirement—the as-seen-on-TV pill for becoming rich. People want to win the lottery or inherit large amounts of unexpected money because otherwise, they just don’t know how they will ever have enough money to retire.
The most interesting thing about how to have enough money to comfortably retire is that, by definition, everyone is already doing it. Retirement indicates you had a job in the first place and you were working. The way to retire comfortably is to work. That’s it. There’s no magic pill that allows all those rich people to retire before you. They worked. And they saved.
The two main reasons people struggle with saving money for retirement are: self-deception and temporal discounting. Let’s examine those more closely:
SELF-DECEPTION: Lying to yourself about retirement comes in many varieties. In some of the worst cases, people cite winning the lottery or the end of the world as their retirement plans. Maybe the world will end before you retire, but there are no odds on that because it’s literally never happened. Your chances for winning the latest powerball jackpot were slightly better than the odds for the world ending: 1 in 292.2 million. Not great chances. Other people “can’t afford” to save money now but they lie to themselves by saying they will be able to save when they make more money. This retirement tactic is betting against yourself. What if you never make significantly more than you do right now? Even if you do, you are giving up the power of compound interest and forcing yourself to work even harder to save the same amount of money at a later date. Also, how can you count on yourself to “afford” saving for retirement later and not keep justifying that you “just don’t make enough”?
Self-deception leads people into believing that debt is normal and living paycheck-to-paycheck is the only possible way. Adults have forgotten the basic elementary school lesson about needs vs. wants. My daughter just brought home a lesson from school where they were stranded on an island and had to pick from a list of things they needed and put the rest under “want.” Needs included food, shelter, clothing, and heat. Wants included toys, games, cars, furniture, and books. It was a silly assignment. Even my daughter thought so. It was “SO EASY” she said. But I think the same assignment should be given to everyone employed full-time because we seem to forget. Suddenly, we NEED a new car, a new couch, and more toys. We fail the assignment (no, we’re not smarter than a second grader!). “Needs” on the assignment also did not include a fancy house, brand-name clothes, or catered food. We don’t need nice versions of those things and it is possible to find a place somewhere between living paycheck-to-paycheck but having all the things and being stranded on an island with loads of money in the bank. It all comes down to being honest with yourself.
TEMPORAL DISCOUNTING: The basic definition of temporal discounting is that money loses its value over time. For example if I offered to give you $10 today or $10 in a week, you would choose the $10 today because there is no benefit to waiting. The $10 next week is worth less to you. But what if I offered you $10 today or $12 in a week? Would $2 be worth waiting a week? You don’t know me… maybe you don’t trust I’ll give it to you. You can also think of so many things to do with $10 today and offering you cash got you excited to use it right now.
Researchers have been making temporal discounting calculations for years trying to understand exactly how much we devalue our future money in favor of money today. We are the same way with our retirement money. When we get a paycheck, we want to use that money right now. We overvalue having nice cars, big houses, fancy vacations, and other fancy “stuff” right now because we can’t imagine saving for retirement is worth as much.
One of the reasons we are guilty of devaluing money in the future is that we are generally terrible at considering our future selves. We picture some stereotypic old person in a rocking chair and that vision is not enough to motivate us to get there. That person doesn’t need money. They’re OLD! And BORING. Spoiler: Your future self is STILL YOU. Instead of adding a vague face, grey hair (or bald!), take a good look in the mirror. The person looking back at you is the one you’re cheating. Do you want to work forever? Would you rather have all the fancy things and work all the time or would you rather save some money to be able to enjoy whatever you want all day every day when you no longer have to work?
It is important to make “temporal discounting calculations.” No, retirement is not worth working extremely hard and missing all opportunities for the next ten to thirty years. That is the path to being both rich and miserable. You’ll ruin relationships. You’ll miss your children’s childhoods. You’ll have regrets and you’ll have to live with them. Future money should only be discounted for something that is worth more than money today. Don’t rob your future self to make today’s self the coolest-looking guy at the office. That’s not worth it.
Make a list of your top 3 priorities. When Mr. T and I actually took time to write down our priorities, they all fell under: Family, Experiences (ie: Travel, New Skills, etc.), and Church. After you have your 3 most important things, write them down and post them somewhere that you see daily. Keep those in mind. When you go to swipe that credit card, picture that list and ask yourself: “Does this money benefit my top three priorities?” If the answer is NO, put the credit card back and walk away.
By simply being honest with yourself about your finances and making calculated decisions about the money you spend today over the money you save, you actually have a chance at having enough money to comfortably retire. And then the only question is: Will you retire early?