Between now and the end of this year, I want to give you some pointers to think about to improve your retirement planning. This information is provided with couples and families in mind but the single person can cogitate on these points for future implementation. Each point is a behavior that is designed to help you, the reader, improve your chances of a successful retirement. The earlier you adopt these points the more impact they will have. I hope you find each behavior discussed of value to changing your destiny.
Make a commitment to live without debt
Debt (the residual effect of credit) is a wealth killer. Debt will steal your joy, kill your relationships, and destroy your reputation. Someone once asked me if there were any positive aspects of debt or the use of debt as a tool. I explained to him that he needed to reframe the question to "Should credit be used as a tool for wealth building?" The answer is absolutely not, unless you are trying to build the wealth of the lender. I do not deny that a person can use credit, with discipline, as a deferral mechanism as long as that person has the financial resources in the bank to cover the amount borrowed. But credit is not a wealth building tool. You cannot build wealth while paying interest. Most commercial loans are heavily front-loaded with interest payments. This is the way that banks and lending institutions ensure profits. If you are lucky enough to have a windfall in the fifth year of your mortgage or home equity loan, and you decide to pay off your loan, you have still paid a large amount of interest up front. This is pure profit for the bank.
Credit can be used as a tool in the context of making home purchases. The one hundred percent down plan is a great way to buy a house. However, in most realities, having a mortgage is an acceptable use of credit. Outside of a mortgage, credit, and the debt associated with it, will reduce your ability to improve your retirement planning. I heard of one poor fellow who thought he would tap his 401k by taking a loan against it. His plan was to take a loan from his 401k and deposit it into his brokerage account to reinvest. In theory, he was building up one account with borrowed money from a tax favored account. Unfortunately, his company started laying-off and his number was up. Now he faced selling his investments at a loss to cover the loan from his 401k or face the reality of incurring a tax and early withdrawal penalty. If you combine both incomes, live below your means, learn to live on one paycheck and bank the other, think before you make a large purchase, and eliminate your current debt and commit to living without future debt, you will be able to improve your retirement planning.
As you begin to develop these retirement-improving behaviors, set some absolutes concerning the use of credit. First and foremost, pay off any and all debt prior to establishing and implementing a retirement plan. Your assets will grow quicker when there is no debt in the picture. After you have eliminated your existing debt (the residual effect of credit) Begin the process of creating the foundation of a solid retirement plan. This foundation consists of several pieces of the financial landscape. First, it consists of having an emergency fund. This is a fund, separate from the other financial resources you possess, which sole purpose is to sit and wait for an emergency to happen. I find it best to hold this fund in a state level tax-free money market fund. It won't grow a lot from organic means (interest, dividends, or capital gains), but it is not designed to grow. It is designed to just sit and wait for an emergency. Optimally, this fund will hold half a year's gross salary based on the highest wage earners income. This will provide enough protection to wait out a financial storm.
Second, it consists of a sinking fund. This is a fund that is designed to cover long-term financial expenses such as a roof replacement, a new car purchase, or an HVAC system replacement. If you know that in five years you want to purchase a new car for cash, then each year you would budget one fifth of the projected cost of the car into a separate account used to hold those funds. Obviously you would be putting away one-sixtieth of the cost every month if you do a monthly budget. If you are trapped in the cycle of using credit to artificially inflate your monthly income, you will not be able to establish these types of foundational accounts. These accounts are designed to put space between you and life so that you can develop a well planned and implemented retirement plan.
Ken Rupert - author of: