Over the last few weeks the worldwide markets experienced a major correction. Trillions of dollars of wealth was erased from ledgers. While I feel for those who are at or near retirement, and as much as I hate seeing the lower numbers in my retirement account, this has motivated me to invest more money.
One reason I am motivated is because the markets are substantially lower, and now may be a good time to increase retirement contributions. The other reason I am motivated is because I know that the more money I invest now, the more options I will have later in life.
Compound interest is an extremely powerful force and the longer my money is working for me by compounding, the less I will need to add to it later in life. My ultimate financial goal is retirement, and I want to ensure I get there with as little stress as possible.
Two biggest retirement questions: When can you retire and how much money do you need for retirement?
Unless your retirement is in a few years and you have a strong handle on your finances and expenses, these two questions are extremely difficult, if not impossible, to answer.
When can you retire? Because of this global financial crisis, many people have delayed their retirement date because their retirement accounts lost too much value. Many people simply cannot afford to retire right now. This isn’t the first time this has happened either – the same thing happened when the tech bubble burst in 2000, which was compounded by the market drops following the September 11th attacks. Before that, the market crash in 1987 delayed retirement for many people.
Part of the problem for many people was poor asset allocation. But even a portfolio with a strong asset allocation can be affected by a bad bear market and the owner may have to delay retirement. But the more you have stashed away for a rainy day and the better your asset allocation, the better you will be able to weather a bear market.
How much money do you need for retirement? Many people create formulas to answer this question.
If you want to retire at “x”% of your current income you need to save “x” dollars per year.
But all of that is just guesswork and makes assumptions on predicted inflation, return on investment, etc. My retirement is 30 years from now and to be quite honest, I don’t think it is possible to make an accurate guess as to how much money I will need – at least not until I am much closer to retirement age.
Invest as much money as you can invest NOW
My solution to both of these questions is to invest as much as I can comfortably invest now, so that I have more options later. The younger you are, the longer you have for the power of compound interest to work in your favor. It is much easier to answer the question “how much money can I contribute now?” than it is to answer “how much money will I need and how much money do I need to invest to get me there?”
My retirement is as of yet an unwritten book. I don’t know when I will retire or how much money I will need in retirement. But I do know that the more I invest now, the less work I will need to do later, and the better off I will be in the long run.