This article is a part of a month-long Morningstar Money Challenge. You can find the details here.
Some would argue that the point of working is to one day stop working - or to have enough to retire. I certainly spend a lot of my time thinking about what I'd be doing when I retire, and I'd wager most investors are the same. Like me, I'm also certain that many investors worry about how they'll get there - will they have enough?
Simply put, starting down the road to retirement means beginning to accumulate enough wealth to afford the lifestyle of your choosing once you stop working. But the reality is never as simple. What is ‘retirement’ for me may be impossible for you, and vice versa. There are as many different interpretations of what constitutes retirement, and as many different routes to get there, as there are individual retirees. Plus, retirement is more than money.
“Life used to have three stages, Learn, Earn and Burn. But now, life is much more nuanced. If you know at birth that you will live to 100, will you leave home at 18, and follow what was the ‘usual’ path, including into retirement?” asks retirement author Don Ezra.
He says there is an important need for retirees today to ask themselves three key questions related to retirement:
- Who am I?
- How do I fill my time?
- Will I outlive my money?
The key to starting retirement planning is to start early. As Morningstar Canada’s director of research Paul Kaplan says, successful investing is a long game. Here’s how he explains why:
I started my career in investment research in 1988 when I joined a small firm called Ibbotson Associates in Chicago. Ibbotson was best known for its annual publication, the Stocks, Bonds, Bills, and Inflation (SBBI) Yearbook. The Yearbook presented the monthly performance of major U.S. asset classes with data going back to January 1926. The book contained a chart, which was also available as a poster, that showed how one dollar invested on December 31, 1925 in stocks, bonds, and cash would have grown if continually reinvested. The stock indices grew to many fold times the value of the bond and cash indices. But the chart also showed that along the way, there were market crashes and recoveries. Recently, I have created updated and extended growth charts for both the U.S. and Canadian stock markets. These charts show that both the pain and rewards of equity investing have continued.
The lesson that I learned from that chart, is as important now (if not more important) than it was 32 years ago: successful investing is a long game. Over the long run, the equity markets have greatly rewarded those with patience and nerves of steel. (You may even want to buy in falling markets and sell in rising markets to maintain your level of risk as part of an asset allocation strategy that includes bonds and cash.) But you have to able to stomach the losses along the way. One caveat: there is no guarantee that markets will behave in the future as they’ve done in the past. But I think that it is still a good bet that they will.
Additional Reading
An Investment Policy Statement
A Retirement Readiness Checklist
Unsure when to retire?
Retirement might seem like it is a very long way away, but that’s exactly why it’s a good time to start thinking about it.
Morningstar’s director of investor education Karen Wallace often hears younger investors say that they can't afford to contribute to retirement account right now. That makes sense. Younger investors are more likely to be saddled with student debt, saving for short-term goals like a car, or a down payment on a home.
“But it really is worthwhile to save whatever you can afford to, even if it doesn't seem like much. I think of money invested in your 20s and 30s as superdollars: with several decades to compound, this money has incredible growth potential. One dollar compounding at 6% per year will be worth $10.30 in 40 years. One dollar compounding at 6% will only be worth a third of that, $3.20, after 20 years. Put simply, the younger you are when you start investing, the more time your money has to grow and the less money you will need to save to reach your goal. By contrast, the longer you wait, the less "super" your dollars get,” Wallace points out.
To help ease some of that worry, Morningstar’s director of personal finance Christine Benz has created a path to help you on your road to retirement. For early-stage investors, there are tips on how to invest for an event that is decades in the future. For mid-career accumulators, there are strategies on how to manage multiple priorities. For pre-retirees, there's ideas on how to embark on a savings sprint. For retirees, there are solutions for managing the day-to-day - and the future.
Additional Reading
An investing road map for early-career accumulators
An investing road map for mid-career accumulators
An investing road map for pre-retirees
An investing road map for retirees
And don’t worry, we will talk about this some more over the next few days, to help you figure out how to work some of this out. For now, start thinking about it!
