This is something I think about a lot, possibly because I'm just getting older. It seems that not only should I finally one day decide what I want to do with my life, but I should also be planning for retirement.
Hands up everyone who feels their future has been royally screwed by the WTS experience?
If you were a good JW and followed the WTS advice you could well be finding yourself facing middle or even old age without much or anything put aside in retirement savings. It's kind of a double whammy because the same advice often made people not focus on a career which could also mean lower earnings.
It can easily get you down which can make you want to put off looking at it as though that will make the problem go away. But it could be worse and it's never too late to do something about it.
Here's my take on things (disclaimer: I am not a financial adviser - you should really go see a real one!).
First of all, a general observation - there is a negative gravity toward a 0 bank account balance. When you have debt, it's hard to get out of but once you get some savings, things can quickly accumulate through compounding interest.
So the first thing to do is get out of debt. This doesn't mean you should worry about all debt though - a mortgage for an asset like a house is 'good debt' (especially if you have a low interest rate) but if you have short-term debts such as credit card balances you should definitely be wanting to pay those off first before you start saving.
The way to look at debt and saving is on the returns. If you can get 5% or 6% returns and your debt is only at 2% then it makes more sense to invest rather than to pay off the debt and vice versa - if your credit card is charging you 20% or more then paying that down is effectively giving you 20% returns. Overpaying a bit on your mortgage each month can have a dramatic effect on the interest you ultimately end up paying - it's less attractive if you have a low rate but if you don't, why not look at changing your mortgage to save money too!
Getting out of debt is hard but it's not impossible. It's like losing weight - it's not just excercising (paying off debt) but also what you eat (how you spend). What made a big difference to me was looking at not just the cost of something now but the potential future value of that money. So, when you feel you need that new iPhone, instead of it being $1,000 or more (and it's always that - don't let subsidized phone prices fool you) you should look at it as $1,000 compounded over the next 25 years which comes to about $4,500. Do you really want to spend that on a phone? Will it be the last phone you ever buy or will you need another in 2-3 years? It soon adds up and makes a dent in your future. The difference between last years model for $50 and the latest and greatest can work out to be significantly more than the sticker price.
Most advisers recommend you have an emergency fund of 3-6 months to live on in case you lose your job or something serious happens. I actually think this depends on your situation - if you have access to credit then you don't need as much of your savings to be immediately liquid. The reason is that the instant access savings typically have much lower rates so your money is not working for you and 3-6 months worth of money can be a significant proportion of your available funds.
Making your money work is all about compound interest. It's the opposite of credit card debt that drags you down - instead of you paying someone else to use their money each month, someone pays you to use yours. Here's a good calculator to show how it works:
Save $1,000 a month for 25 years and get 7% returns and you will have nearly $1m to retire on over and above any state provisions you may be entitled to. Try some scenarios out with your own figures. Maybe don't plan on retiring at 55 (deferring your pension to 68 or later now gets you more state pension in many countries - something else to factor in).
But you may not have a spare $1,000 a month, right?
I find I rarely miss having new shiny things and the phone pricing also highlights more savings. Very often you find yourself paying for things you don't really need or use whether it's phone plan features or TV channels. Sometimes it just takes a few minutes to discover an extra $20-$50 is going out of your account every month and that too adds up to a lot. Not having the latest phone and subsidized plan can save $20 plus the half-cost of the handset.
I don't advocate living like a monk and cutting every luxury out, but maybe the $2 coffee is just as nice as the fancy $6 cup ... again, if it's something that you regularly pay out every day it is amazing how much it adds up to in a month and then how much that accumulates to when compounded over many years.
You may not find $1,000 a month but once you start with the saving mindset and you pay down debts it starts to build up. Eventually the money that you were paying on credit card interest becomes money you can be paying into savings. You'll be amazed.
The next step is deciding where to put your money. The big banks pay out a miserable rate on most savings accounts - if it's close to or less than inflation then they are stealing money off you. The best way to get bigger returns is by investing in the stock market but this isn't as scary as it sounds.
Mutual Funds (a pool of stock picks chosen by a fund manager) are probably the best first step to getting some stock market exposure and you can chose either a general fund (index finds that track the stock market are good because their costs are low) or you can pick funds covering certain countries, markets or segments (e.g. banking or technology). What you think will give good returns depends on your view of the future and your tolerance to risk.
And this is another whammy. If your savings and investments are critical and you're playing catch-up then it's harder to have them grow as fast. Higher rates usually carry higher risk and that is why someone with a lot of money can earn a lot more money than someone without - they can afford to take greater risks with it.
The exact rate you can earn will vary with the funds and some that have done well in the past won't automatically do well in the future. I like the index funds and high dividend funds but that's just personal preference. Years ago, in the heady days of pension misselling, it wasn't unusual for brokers to run scenarios showing you getting 11%, 12% or even greater returns which made for awesome looking retirement plans but was found to be totally unrealistic. I think 6% or 7% is more reasonable over the long term.
Saving a set amount each month also helps with investments - you automatically buy less when the prices are high and more when they are lower so you don't need to worry about the ups and downs of the market quite so much. Even a market moving mostly sideways will bring you out ahead with this compared to trying to 'time the market' and put a big chunk of money in, possibly at the wrong time.
Your investment should be through any government scheme (401k, RRSP etc...) so you get the tax benefits of investing - yes, the government will give you money for saving some!
Another option to consider (esp. if you are in the UK as it seems way more established there) is Peer2Peer lending. This is where a company acts as the middle-man to bring borrowers and lenders together kind of like the banks but you can get to be a lender more directly. They split your money up into part-loans to other people and you typically make a lot more than you do with a bank savings account. It is slightly more risky as the funds aren't covered by the normal banking system (not that it is full protection anyway if you read the small print) and most of the companies have their own contingency funds and systems to cover bad debts.
But it's like having a savings account that is paying you 6% or more with less risk of the stock market going down!
At this point you may be still disheartened. You go on the retirement calculators and they tell you that you need to be saving way more money than you currently have spare to save in order to live a semi-decent life.
Here's why I think most of them are bullshit and you should stop worrying: Put the exact same numbers into them all and you get wildly different results. So why are they so 'out'?
Most of them are designed to separate you from your money. If someone is in the business of selling investment funds then they want you to invest as much of your money as you can. The more the better and too much doesn't matter to them. It is an industry and they are trying to sell you their product. Fear of not saving enough seems to have replaced exaggerated returns as an incentive.
We're probably not at the 'too much' end of the spectrum but the results can make you feel like giving up. Remember though, anything is always infinitely better than nothing. And it turns out that you may not need as much as many of the guides say you do because they seem to assume you will need close to the same income.
Think about your major outgoings. These are typically housing, food & clothing, transport, savings / bills.
When you retire and you are not going to work every day, will you need as many clothes? Probably not.
Even if you take sandwiches or make your own meals (more things to save money) you will probably still find yourself eating out more as part of going to work (e.g. drinks after work). That will likely go down.
How do you get to work? Car or transit? There's a major expense that could be gone.
If you are paying a mortgage then that should be paid off at some point, another major chunk.
Finally, the payment into your pension and savings itself - you stop paying that when you retire.
So while many of the calculators say you'll need 85% of your income or more, I think 50% is certainly realistic and can dramatically alter the outlook for the better. Of course your exact situation will vary based on your plans of how you see yourself living but it's good to think of all the pieces rather than just assume the whole that someone says you'll need is correct.
You need to factor in other life events of course - kids going to college and such things which will be a temporary increase in expenses. It's OK if you go backwards once in a while - as long as you make progress overall.
Even if you only have a decade until retirement, you can accomplish a lot in that time if you focus your efforts and start tackling things today. The more time you have the better but the main thing is to not get down about it and assume that the rest of the never-JW world all have huge pension pots. While we were living our pious lives in the religion, they were blowing their money on fast cars and the showy display of ones means of life (ha, had to throw something WTS in there) so there are a lot of people who haven't got a great retirement plan in place.
The main thing is to have a plan.
Please add your own ideas and suggestions, there are lots of things to add:
- Second jobs to boost income
- Turning hobbies into income
- Selling unused items
- Robbing banks (OK, maybe not - I just wanted to see if anyone read this far)