Bobservations: Retirement Planning
As the Pastor of Business and Finance, one of my roles is the oversight of the Agape fund. For those not familiar with it, the Agape fund is a designated benevolence fund designed specifically to provide one-time financial aid to those in financial crisis. I recently had the opportunity to meet with someone (not from our church) who was in need of financial assistance. I won’t get into the details, but as with most Agape requests, I ask some very direct and personal questions about their finances – what are their expenses, what is their income or income potential, what is their debt situation. In this particular case, I also asked about their retirement plan since they looked to be about my age. I was met with a blank stare. The silence said everything! I realize that most of the people who come in for financial aid aren’t thinking about retirement; they are simply trying to get through a rough patch and the thought of retiring seems too far out of reach. But what about you; are you thinking about retirement?
Recently, my wife Diane and I started reading Chris Hogan’s book, Retire Inspired, and it really lit a fire under us. Like so many my age, I grew up with the false belief that when I reached the age of 65, I would retire and Social Security would take care of my financial needs. If that is your plan, here is a quick history lesson that may change your mind. The Social Security Act of 1935 is an outcome of Franklin Delano Roosevelt’s Economic Bill of Rights. Social Security was a type of government safety net to provide some income at retirement. The Social Security Act established the retirement age at 65 when life expectancy in 1935 was 60. According to the Social Security Administration (SSA), life expectancy today is 84 for men and 86 for women. Furthermore, the SSA shows the average retirement benefit is $1,369 a month, not nearly enough for most retirees. That’s why in 1974, President Kennedy enacted the Employee Retirement Income Security Act (ERISA) that set minimum standards for pension and health plans in private industry. Thus, the 401(k) and other tax preferred savings were born with the understanding that the responsibility of planning, sacrifice, and diligence is placed on the individual instead of the government. In other words, the government acknowledges that Social Security alone will not be enough; it is up to you to plan for your retirement.
Throughout his book, Chris Hogan dispels the myth that we can retire at age 65 by repeating the mantra that “retirement is not an age, it’s a financial number.” Some people cannot afford to retire at 65 because they don’t have enough money, while others may be able to retire much earlier. If reading this post is making you a bit anxious wondering what your number is and what it will take to get you there, you can calculate your R:IQ (Retirement IQ) number for free by clicking on this link. Albert Einstein is quoted as saying, “compound interest is the eighth wonder of the world.” This simply means that the sooner you get started saving for retirement, the sooner you’ll hit your retirement number. However, I must caution you as one who adheres to the Dave Ramsey baby steps, do not get ahead of yourself. If you do not have a $1,000 emergency fund; if you still have non-mortgage debt; if you do not have 3-6 months of living expenses saved up in liquid cash; you are probably not ready for this step. If you are ready, here are a few high level tips:
- Never invest in something you do not understand
- Determine if an IRA or a Roth IRA is best for you. (Super simple definition: IRA is a pre-tax investment meaning you are not taxed on the money when it goes in, only when you take it out. Roth IRA is after-tax meaning you are taxed on the money before it is invested, but all growth is tax free.)
- Have a diversified portfolio, which is a fancy way to say spread your investments around to lower the risk. (FPU provides an excellent standard diversification mix.)
- Take advantage of tax-favored plans (IRA, 401(k), 403(b), etc.…) whenever possible
- Never borrow against your retirement plan
I am passionate about handling money in a way that honors God and know that we all make better decisions when we have more information. My hope is that this high level overview inspires you to take action and start planning for your retirement regardless of your age because it’s never too late to start. If this post stirs up a desire in you to know more about how to handle money God’s way, be sure to check the Sunridge events page and watch for dates of the next session of Financial Peace University and enroll.