When I was making college-related choices with my son, we were inundated with questions. But we knew a decision would need to be reached because of a pretty short timeline. This tangible goal made the process easier, and he ultimately made a decision that met my financial parameters and his career goals.
Unfortunately, the same process doesn't necessarily apply to retirement. When it comes to retirement, the timeline is so long – and the end goal is difficult to envision – that we think we have all the time in the world to plan. As a result, we often put off saving because we believe a better time to invest is later in life.
Whether it is our own personal situation or things occurring around us, it's easy to punt when it comes time to set aside money for our future.
There will always be reasons not to save. Politics, demographics and economic policy are always changing, just like our own lifestyles, creating confusion and encouraging our reluctance to save. For example, this year I'm seeing some investors hesitant to enter the markets because of the fiscal cliff, the presidential election and other global economic uncertainty.
Having this attitude is dangerous and could jeopardize your retirement because there is a very strong incentive to invest as early as you possibly can, a concept known as the time value of money.
What is the time value of money? I'll use an analogy to demonstrate how putting off saving for just five years changes the eventual nest egg.
Investor A sacrifices today and contributes just 10 percent of his $42,000 salary ($350/month) for the next 20 years. By the time retirement rolls around, Investor A has a nest egg of $143,861, assuming a modest 5 percent average return.
Investor B has the same salary but decides to wait five years to start saving for retirement. In order for him to end up with the same exact nest egg of $143,861, he would need to stash away $538/month - almost an extra $200 a month!
This concept also rings true for nervous investors who pull money out of the markets and sit on the sidelines because they're fearful of losing money. If you aren't active in the markets for five years, then that's five years of gains you could miss out on.
Hopefully you're convinced that the decision to set aside money for tomorrow shouldn't be a hard one to make. Just as the time value money can work for us, so can the world around us producing more investment opportunities.
Do you need to guess the best strategy? No, but it sure helps. Consider diversifying your strategy – not just your holdings – and set in motion a decision to save for tomorrow.
You can analyze your situation or the uncontrollable factors around you for as long as you want. However, every moment you wait to save will cost you more tomorrow, either in the time you must work, the amount you must save or in the standard of living you envision.
While many strategies work some of the time, none work all the time. Consider several strategies and work with a trusted advisor who carries the title of a certified financial planner.
Start today - you'll thank yourself later!
