The 40/70 Reality
Thinking and acting wisely with respect to long-term life trade-offs can be very difficult. There are a number of health-related examples that immediately come to mind, such as diet, exercise and sleep.
→ While we know the “best” decisions – avoiding processed food, saying no to the abundant spread of office junk, sticking with a consistent schedule of aerobic and anaerobic exercise and getting sufficient sleep – the majority of us don’t stick to the plan long enough to reap long-term rewards. Personal finance decisions, notably around retirement planning, also face the same kind of defiance within our decision-making DNA.
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It’s not as though we are unconcerned about our future health and financial well-being. After all, there is not one living person that has a higher vested interest in our future than ourselves! It is simply that our minds don’t fully appreciate the value of the future with the same degree of intensity as the value of time today. This psychological concept, called time discounting, occurs when “rewards become so distant in time that they cease to be valuable or to have additive effects.” So, essentially, we are fighting human nature when it comes to making positive life changes.
“On the front-end of the retirement decision, saving early and often are guiding principles to deal with the 40/70 reality.”
I’ll leave it to the medical experts to outline how to modify our health behavior. However, if we are going to connect today to the financial realities of the future, we’ll need to embrace the 40/70 reality: a career may span 40 years, but lifetime earnings may need to cover 70 (or more) years of living expenses! In other words, since retirement is basically a period of time where paychecks stop while expenses continue, today’s savings creates tomorrow’s income.
On the front-end of the retirement decision, saving early and often are guiding principles to deal with the 40/70 reality. Here are two practical recommendations to turn these principles into action. ⇣
1) Make retirement saving decisions habitual.
⇢ There is a lot of research on the power of habits (if you need a recommendation, start with Douhig). Habits create routines and routines are done with little or no conscious thought; thus, they require less will-power to occur. The most important decision around positive retirement habits is systematic saving in a company-sponsored retirement plan. This means setting aside a set percentage of earnings each pay period. Next, take this a step further, establish a plan to automatically increase this percentage each year (as recommended in this Ted Talk). If the annual plan limits are reached, take advantage of the whole host of IRA planning opportunities. ⇣
2) Write down an ideal retirement timeline and revisit it annually.
“In today’s tech-resource rich environment, consider downloading a time calendar app and have it count down toward your ideal retirement goal. Watch those days and weeks tick away. ”
⇢ Retirement can feel as though it is always just “out there”, a long time away. Time discounting occurs because there is no definitive bridge in our mind between today and the future. This feeling typically dominates working professionals who are otherwise preoccupied with their current personal and work lives, until “the moment” occurs. “The moment” is the instance in time when one realizes that retirement is no longer out there, it is right here! Outlining a personal retirement timeline makes you count off the number of years until your ideal retirement age. Updating this plan each year forces you to mark down the amount of time remaining. In today’s tech-resource rich environment, consider downloading a time calendar app and have it count down toward your ideal retirement goal. Watch those days and weeks tick away.
The transition from salary continuation plans (pensions) to account-based retirement plans (401(k)s) has left workers without a promise of what life after work looks like, financially. Embracing the 40/70 reality is the first step in putting this kind of structure back in place. ⬥
Investment advisory services provided by Forward Wealth Management, LLC. Past performance may not be indicative of future results. All investing involves risk, including the potential for loss of principal. There is no guarantee that any investment plan or strategy will be successful.