In retirement planning, don’t start with what or where… start with why.
by Byron Moore, CFP®, posted February 12, 2018
Originally published in the News Star and the Shreveport Times on Sunday, February 11, 2018.
Question: I am about to sign up for my company’s retirement plan. I’m 40 and getting a late start. With the market where it is, where should I invest the money now?
Answer: Maybe in something outside a retirement plan. And maybe in something that isn’t an investment at all.
A man walks in to a hardware store with a long list of building supplies he wants to buy. He’s in a hurry.
“Can you get all this stuff for me…today?”
“We sure can,” the owner answers cheerfully. “Building a house?” he asks, knowing the answer as he looks over the list.
“Well, I’m about to anyway,” says the man, obviously annoyed by the question.
“So,” the owner says as you scans the list of needed supplies, “this list looks…kind of random. Do you mind if I look over your house plans to see if you’ve left something out?”
“I don’t have any plans,” the man says. “I’m late getting started and I’m just going to start and do the best I can as fast as I can.”
By now the owner is scratching his head. “Well, have you had your foundation poured yet?”
“Got no time for that either!” Now the fellow is really irritated. “I told you, I’m in a hurry. I told my wife years ago I’d have her dream home built by now and I ain’t got it done yet. I got no time for house plans or foundations. I need to get started on this house!”
You get the point.
It’s a silly little story that could never happen in real life because the consequences of trying to build a house with no plans on no foundation are just too ridiculous to imagine.
But if that’s true, why do so many people persist in doing just that with their retirement?
They barge into a retirement hardware store and start asking for materials.
“What fund should I buy? Do I really need an annuity? How much should I put in my 401K? International stocks or domestic? Is the bond market about to tank? Can I own real estate in my IRA? Should I do a Roth or a traditional IRA?”
And on and on they go, shopping for building materials with no plan. And with no foundation.
I’m not sure which is worse. But it doesn’t matter, because the lack of either nearly always leads to problems.
A plan will demonstrate the absolute necessity of balancing cash flow, lifestyle, protection, savings, debt and growth. No one of these areas is “more important” than the other. The secret is balancing them in the most efficient manner for you.
A foundation (which is always step one in any plan) is made up of protection and savings.
You must protect yourself and your possessions against the significant perils of life: accidents, sickness, catastrophes, lawsuits, disability and premature death. Most of that is done by various forms of insurance and a few legal documents.
Savings create a financial buffer against the fluctuations of fortune that all of us experience in life. If a car breaks down or a roof needs repair or if you lose your job, you quickly find out the value of having quickly accessible cash.
I’ve seen too many 40- and 50-year-olds just dig a deeper hole for themselves by trying to extract themselves from the hole they’re already in. And it is usually the lack of any plan that makes them feel more desperate than they should. Often a plan shows them how hopeful their situation could really be.
But not without a plan. And not without a foundation.
First things first.
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