I WAS Officially Depressed, but Feeling Better Now

July 22, 2011

What started out as a quick thought about a depressing article on the difficulty younger generations may face preparing for retirement, has now become a mini-series about some of the positive trends I see, and today’s thoughts (the last installment of this series) are on some things that people who have a few decades prior to retirement can do to get into a much better long term financial position.

Any time I meet with a person in their 20’s, I feel compelled to share this article about the difference that can be made by investing at age 25 vs. age 35. A person who invests from age 25-35 has more money at age 65 than someone who invests the same amount from age 35-65, and gets the same investment returns. It amazes me every time I read it. Occasionally, I’ll build a quick Excel calculator to double check the numbers, and guess what, they are always the same! They are legitimate, and it’s true. I have shared this with dozens of recent college graduates who are the children of my friends, and I’ve heard from a few of my friends that the kids have enrolled in the 401(k) on Day 1 of their post-college work life. That always makes me smile.

Along with enrolling and contributing, developing a consistent investment philosophy can be tremendously helpful. Far too many people get optimistic at the top of an investment cycle and rush in at the worst possible time to buy. Then, the market goes down and they sell at the bottom. Their emotions create a “Buy High, Sell Low” investment strategy. Maintaining your discipline and a consistent strategy, in good times and bad, will help you avoid the emotional rollercoaster that investing can be if you allow it. Having the foresight to understand your risk tolerance, and build a portfolio consistent with it, is step #1. From there, maintaining your composure and discipline in the face of bad news becomes the most important thing you can do in regard to your investment dollars.

I wish I could tell you that the number of people I met with who did the scenario below was small, but if I did, I’d be lying.

Invested very aggressively before the markets tanked in 2008.
Moved to all cash (or an extremely conservative portfolio) AFTER they lost 30, 40 and 50 percent of their balances.
Moved back to an aggressive portfolio after the markets recovered in 2009 and 2010.

Here is something that’s harder to do than it sounds, and it’s probably not the first time that you’ve heard it. Save more money! You may be thinking, “Thank you Captain Obvious!” And, while not a completely novel idea, I want to share a few cool articles on the subject and give you this tip.

Read all of these articles and write down all of the ideas you are going to use. Then, estimate how much you will save by using these simple ideas. And finally, here’s the key part, set up an automatic transfer into savings (or an investment account, or your 401(k)) for that amount. Here’s why. If you do that, the money will leave your checking account and you will be forced to reduce your spending by at least that much. That will help build your wealth slowly.

Let’s talk a minute about preventing catastrophes that could wipe out your wealth in an instant. Talk with your insurance advisor at least once a year in order to make sure that your coverage levels for auto, homeowners/renters, and personal liability are high enough to cover a major incident that hopefully will never occur. Also, your health insurance can play a role in this as well. If you have a HSA or FSA (or both) available to you, FUND IT! The balance that you will accumulate can help you in so many ways later. I’ve never seen anyone adversely impacted by having a healthy HSA balance! These steps can help you prevent a catastrophic loss, and protect the wealth that you are working so hard to build.

I have also met a fair number of younger workers who understand that Social Security may not be generous for them, pensions may not be available to them, and they are 100% solely responsible to build their financial future. They are currently working, but are also creating small businesses that can supplement their incomes or perhaps one day even replace it. I’ve met with photographers, guitar teachers, writers, singers, real estate developers, and jewelry designers who all have a “day job” to go along with their business, which is usually based on a personal passion. They have a Plan B already in place.

With a focus on a few small things that I mentioned here, significant and real results can be achieved. All of these things can be controlled by individuals. That, combined with some of the trends that I am seeing from employers and the economy, give me reason to have hope for the generations that research indicates will struggle to reach their retirement goals.