Retirement Savings Clichés
Having been in this business nearly 28 years, I have heard almost every retirement savings cliché that there is. While some have validity, others do not. Let’s take a look at the more popular retirement savings clichés and see if they should hang around or be “retired,” themselves:
- “Pay yourself first” — For me, this one never gets old. And, with the advent of modern technology, such as automated savings programs that will automatically move money from a checking to a savings account or automatically save pay raises, paying yourself first has never been easier. By “paying yourself” in the form of automated savings prior to other outlays, you adapt your spending to your savings patterns. And this can help put you on the road to financial independence. If you fail to pay yourself first and let your spending patterns dictate your savings, chances are that it will be much more difficult to achieve your retirement and other savings goals. Verdict: Keep the cliché.
- “Cut back on your lattes so you can save for retirement” — As I documented in a previous Top of Mind post, my primary issue with this cliché is that most people do not want to be told that they need to sacrifice to save for retirement and other purposes. The reality is that there are hundreds of ways to save on expenses that have virtually no impact on lifestyle (like avoiding paying full price for anything). Verdict: Retire this one, already!
- “Save as early as you can” — Based on experience, if you don’t start saving in your early 20s (or even younger), I can guarantee that when you reach my age, you will absolutely, positively regret it. The reason is based on simple math - the longer you put your savings to work, the more money you will have, period. Don’t believe me? Then check this out. Verdict: Keep the cliché, for sure.
- “Don’t put all your eggs in one basket when investing” — While it is still important to diversify investments and avoid putting all your eggs in one basket, the reality is that many people are automatically diversified nowadays when they are defaulted to target date funds (TDFs). Since diversifying outside of a TDF requires you to self-direct investments, and a number of studies have demonstrated that TDFs significantly outperform self-direction, the message of this cliché might actually encourage less-than-optimal investment behavior (e.g., choosing a diversified investment strategy on your own vs. investing in a TDF). Verdict: Mixed - I lean toward retiring this one, although the core message of diversification is an important one!
Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice. Opinions expressed are those of the author, and do not necessarily represent the opinions of Cammack Retirement Group.
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