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Should you be thinking of your retirement in your twenties?

A few days ago, I was woken up at about five in the morning with a power cut. The fan stopped circulating the air and the room got really hot. As I could not sleep anymore, I got out of bed and went to the lounge. Then I thought how dependent we have become on electricity, fans and air conditioning to keep us comfortable and how spoiled we have become not being able to put up with the inconvenience of a power cut.

Then I pondered on the millions of people who have no electricity at all but have a good night’s sleep anyway without fans and air conditioning in a warm climate. I also thought how difficult it would be for the likes of us who live in first world conditions even in a developing country if and when things go awry with the environment and our comforts are taken away. Imagine how people in the industrialized west would survive if the comforts of electricity, artificial heating and cooling are taken away. An environmental crisis could do just that.

Yet, there is a notion that the environmental crisis will impact poor people more, whether it is in the developed or the developing world. Certainly, the poor are more immediately affected with an environmental disaster such as a flood or a hurricane. They may have no choice but to live in a flood prone area, for instance. Yet, the poor are much more robust having to survive in a harsher world as a whole. This robustness is what will help them to survive a disaster more than myself, who is spoild by the softer life I lead. As such, poor are much more adaptable to situations by being constantly pushed to the limit, whether its harsh weather conditions, lack of resources or money and they find creative ways of surviving.

Suffering

Certainly, there is suffering amongst the poor. For instance, in Bangladesh – when the Bay of Bengal floods, it displaces a few million people. People die and many get sick from diseases such as cholera. At the same time, as the water recedes they come back to the same land that was immersed and go about their lives again. I see this just outside Dhaka too in the flood plains where people live, cultivate, have brick kilns and run small businesses. There is a season when the entire area goes underwater and people move away for that time and get back to business as the water recedes. There is a certain resilience to the people.

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These hardships are no different to what western countries experience with changing seasons. Before technology made people’s lives easier in the 20th century onward, people were robust and could handle much more hardship. Technology and the comforts that have resulted have made people soft and less resilient today.

So, when and if an environmental disaster hits, it will be poor people that may end up surviving merely by the fact that they might be able to better adapt to survive in harsher conditions.

Preservation

Who knows, nature may play its role in being the great leveller of life between the “haves” and the “have nots” after all.

So, the “haves” have to lead to change the way we live to protect the environment and preserve nature, so we will not have to fight to survive in the first place.

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Life is often about balance. It’s about balancing the instant gratification of today against future rewards.

Financial balance

Environmental catastrophes aside It’s about enjoying life now versus saving enough for later – so that your life can be just as enjoyable after you retire. It’s very difficult to know where that line is because it’s difficult to predict the future. Will taxes go up? How much will inflation be? How much do I need in retirement to continue my lifestyle?

Avoid high interest credit

The first thing one should do to optimise your saving potential and succeed in any investments is to avoid all forms of credit. This means cutting up your plastic, avoiding loan lenders and not spending anything that involves you paying interest to spend your money!

The biggest culprit of eating up people’s good intentions to save are payday loans.

According to the website Simple Payday – a payday loan is short-term credit that a person secures against their next paycheque. To qualify for a payday loan, one must have; a current salary, bank account, email address and mobile phone number.

Legislation of payday loans varies from state to state in the U.S. and from one country to the other, with some states and countries placing caps on the maximum interest rate that can be charged on a payday loan. They are in fact banned in some US states.

The loans are meant to be repaid within 31 days although a customer can request an extension of the time period which in most cases is granted with an additional fee charged.

Proper retirement planning

Most retirement investment planning, at least when you’re in your early twenties, focuses on two accounts – a 401(k) and an IRA, typically a Roth IRA. The contribution limits are $16,500 for the 401(k) and $4,000 for the IRA, higher if you are permitted a catch-up contribution due to your age. If you were to max out your contribution to both, that’s a hefty $20,500 a year towards your retirement. That’s a lot of money for anyone to be contributing and I’d argue that contributing $20,500 each year until you retire is too much. Unless you make a lot of money, contributing that amount will put a significant strain on your current lifestyle and that’s a trade-off that you may not want to make.

Here’s how I approach my retirement planning.


Calculating How Much

How much will you need in retirement? Ask ten people and you’ll get ten numbers. They will all be wrong. I do something simple, I calculate how much money I need to live on today and use the 4% rule. The 4% rule is a retirement rule of thumb that says you can only spend 4% of your nest egg each year if you want it to last for the rest of your life. With appreciation and interest, a 4% drawdown is ideal. That means if you want $40,000 a year in income, you’ll need a $1 million in retirement savings. If you want $80,000 a year, that’s $2 million. Calculating how much you need will depend on your lifestyle, so that’s up to you.

From there, you’ll want to set the finish line at 65 (or whenever), and calculate how much you need to save each year in order to reach that number. Then, calculate how much those savings will grow given rates of appreciation (minus inflation). You can use whatever growth rate you feel comfortable with, I personally use 7% (and 3% inflation). That will give you how much you need to save each year.

Front Load Contributions

My strategy has been to front load my contributions. In the first few years I was working, I contributed as much as I possibly could to both my 401(k) and my Roth IRA. With investing, time is your best ally and you’ll want as much money in the pot as early as possible in order to take advantage of time. I maxed out my contribution for two years before tapering back because I wanted to buy a house. By going full throttle on contributions early, I was able to build up a nice nest egg that can grow on its own.

If you use this strategy, rather than equal contributions each year, remember to recalculate your annual savings needs so you don’t overshoot your target. If you need to save $8,000 a year annually and you contribute $20,000 now, your annual savings needs will go down significantly.

Get Free Cash

At a minimum, I will always contribute enough to get any company match on my 401(k). If your employer offers you a match of any kind, take advantage of it. My first employer offered an extra 3% if I contributed 4% (full match on the first 2%, half match on the next 2%) and I always contributed at least the full amount. Who turns down free money?

Taxes

One point I purposely overlooked was taxes. Contributions to your 401(k) are tax deductible but you pay income taxes on the disbursements during retirement. If you need $80,000 a year and it comes entirely from a 401(k), you’ll need to save for more because you’ll be taxed on that income. I conveniently ignored it because it complicates things and I just figured that any Social Security payments would help offset that tax so that the math would come out close enough. I could be wrong but for the sake of simplicity, that’s where we’re going.

So, are you saving too much?

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