Here is a scenario. You own a car but you are seeking to buy another. The price of your prospective new car just went up by 25 per cent. What would you do?
a) Continue to save for the new car in hope of a deal.
b) Buy a new car of lesser value.
c) Make do with the existing car.
d) Resolve never to buy a new car again because you can’t handle the disappointment.
e) Spend the money you had saved for the car on consumption items like clothes and entertainment.
On the face of it, a, b or c, seem to be reasonable choices; one can even argue, responsible choices. To choose d or e may be seen as irresponsible and lacks discipline.
Now switch the scenario to investing in stocks. You have some cash and would like to invest in the stock market in order to plan for your retirement. The overall stock market is up 25 per cent, just as the T&T stock market was up 21 per cent last year. What would you do?
a) Continue to save so that you can invest in the stock market at some future date if the market pulls back.
b) Invest now with the market that is in front of you.
c) Keep hold of and manage your existing savings.
d) Forget about stock market investing because “that is not for me and I can’t ever figure it out.”
e) Take the money saved for investing in the stock market and spend it on something else.
In the second scenario, how many people would stay with a, b and c, above as opposed to d and e? These choices have already been deemed irresponsible, if not irrational in another scenario.
The choice between having a car or using public transport is usually one of convenience. You are not at the mercy of a schedule, delays, rush for limited access and a one-size-fits-all environment. Your car gives you the opportunity to leave when you want to, with minimal fuss and in an environment customised to suit your tastes and circumstances. In attaining resources for your retirement years, the choice is very similar. You can leave your retirement years to the benevolence of the government of the day where the offer is likely to be less than need as the objective is to give some to more people. Further, whatever is available through the public coffers does not take into account your individual circumstances such as your medical condition, the state of your home and number of dependents. Alternatively, you can take control of your financial situation.
Many people in this country own a car and those who do not own one are in the majority striving to acquire one. How many people are actively and consciously saving for retirement? How many people are seeking the convenience of having their financial destiny in their hands as opposed to relying on the State? All around the world and, this is something that will soon come to the United States, retirement benefits are being slashed as the obligations are unfunded by government’s saddled with mounting debts. If you look closer in the US you will also note that the cost of graduate and post graduate education is also rising and is being funded by a student loan system that has to be paid off first. This means even less resources being put into retirement earlier in a persons life ultimately leading to, at best, a game of catch up in later years. If you recognise the absence of retirement planning or any action associated with that planning in your financial circumstances, then please take the time to rectify the situation starting today.
If you are in a hole, then the first step to getting out is to stop digging. Recognising that you are not meeting your retirement objectives and then resorting to spending your existing savings is equivalent to digging a deeper hole.
The second step to getting out of a difficult situation is to play the hand that you are given rather than hoping to start when better cards arrive. The issue with this approach is that you have a finite timeline to retirement. Time is your friend only if you are invested. There are few certainties in life, but chances are if you are alive into your sixties and seventies then you are likely to be retired. Each day that you wait means that you are one day closer to that target age and you have one day less for your money to grow. Given the importance of starting the process, the obvious question relates to where to start. The simple answer is to start with a savings account. Accumulating funds that return four to five per cent per annum over a 20- to 30-year period are very likely to give you an overall lump sum of more than $1 million. If you set aside $1,500 to $2,500 every month for this purpose, you can get to a major lump sum when you retire.
If you are having trouble setting aside that amount of money, then examine your lifestyle to see where you can reduce expenses and, just as importantly, reduce your debt burden. You are offered loans to pay for a wedding, to go on vacation even to play Carnival. When you borrow money, you have to repay with interest, so the real cost of the wedding, vacation or other nice to have activity is the actual cost plus your interest cost. If you could not afford it in cash, then sometimes it is better to accept that you cannot afford it period and cut your cloth to fit. Somewhere along the road, sacrifices have to be made. Either you sacrifice some of the glamorous life now for financial security down the road or you take the hit in your retirement years when, for example, instead of being able to afford a private hospital, you are forced into a public facility with the challenges that are well understood.
Time for stocks
Once you have understood the need to save and to manage your expenses, the next step is to invest. Investing means purchasing securities that you expect to generate a return over time. An example of this is stocks, where the share price and dividends can combine over time for a positive return. Most investors will ignore the stock market or see it as a last resort. The problem with this thought process is that fixed-income investments and bank deposits are unlikely to generate a rate of return above the rate of inflation now or for the foreseeable future. If saving $2,500 a month is difficult enough, then growing those funds at a rate of five per cent or better above the rate of inflation for 20 to 30 years is even more difficult with a portfolio consisting predominantly of bank deposits and fixed-income investments.
Beyond that, appreciate that if you retire at age 60 and live to 80 then you have to have resources to take your through 20 years. If you are currently 40 years old then you have 20 years to accumulate a sum to see you through for say another 20 years. If stocks can over the long term provide a boost to your investment objectives now then it can also provide a similar boost in the 20 year span post retirement. The worst thing you can do to yourself is to have to try to figure out how the stock market works at age 60 so that you can grow your then lump sum so that it can last you another 20 years. At that time you have no margin for error at a time in your life when learning something new is likely to be most challenging.
Investing for retirement involves planning, it involves action and it involves taking and managing risk. As people live longer these same tools are also required to manage your funds in your post retirement years. The time to get involved is now. Waiting and hoping may just mean that you miss out on the opportunity of your lifetime.