The ending of the title sentence here is . . . if you start saving when you’re young. Yes, the big secret to being able to retire comfortably is no secret at all, but the remarkably simple directive to start saving early. Get on a program of regularly socking away a percentage of your paycheck in your twenties, be half-way prudent with your investing, and your chances of retiring comfortably are quite excellent..
I understand that you may wish to stop reading here. We all know this. We’ve heard it before. We’ve seen the charts that show how much more powerful our savings are when we start early (see chart below). And yet, it’s clearly not something that we all do.
As has been pointed out by many, telling people to save as much as they can is kind of like telling someone who wants to lose weight that all you have to do is eat less and exercise more. We know it, and yet we’re not all thin. As remarkably simple as it is, it’s remarkably hard to execute. On any given evening, it’s far easier to eat pizza and watch TV than it is to go running. And on any given day when you’re 25, it’s far easier to get cable, fancy lattes, or a slightly too nice apartment than it is to think about what it will be like to be a poor retiree in four or five decades.
Investment thinker Charles Ellis recently wrote that we humans are not very good at thinking clearly about money or long periods of time. We find it hard to talk about money, even with people we are close to, and investing is a puzzle for many of us. On top of that, we find it very difficult to think more than a few years out. A retirement in four decades is unimaginable. Combining our difficulties with money and time, it really isn’t surprising that we do not plan for retirement. Just like those who eventually regret having spent their teen years smoking or tanning themselves too much, Ellis says that too many retirees will end up wondering, “Why, oh why, didn’t somebody tell me?”
What to do? Probably nothing you haven’t heard before. Ellis points out that there are five factors that determine how well you live in retirement: 1) how long you work; 2) how much you save; 3) how well you invest; 4) how much you spend each year; and 5) how long you are retired. Since most of us don’t choose when we die, the first two factors are especially important. We should all work later into life. If our employers offer a 401k match, we absolutely must match at least that match. We should think about downsizing our homes, cutting spending, and – much like losing weight -- stick with the regimen day in and day out.
The one thing to note is that if you happen to be young as you read this, you actually have a fighting chance at a comfortable retirement without being lucky or resorting to anything fancy at all. Investor William Bernstein just released a small e-booklet called If You Can: How Millennials Can Get Rich Slowly with just this message. It takes less than an hour to read, is geared to the 20-something reader, and is available for free (or $0.99 on Amazon).
Bernstein’s advice is that young people only need to do a few things to turn out just fine: 1) Save 15% of their paycheck starting at age 25; 2) Invest in a simple set of three low-cost index funds covering U.S. stocks, non-U.S. stocks, and bonds; and 3) Rebalance once a year. He doesn’t say it will be easy. He knows that it is not easy to put away 15% of your pay when consumer temptation beckons. He knows it is not easy to stick with a long-term, low-turnover indexing plan when the natural tendency is to chase performance and buy and sell at exactly the wrong times. He just says that it can be simple.
We can quibble with some of the details in Bernstein’s advice. And if you’re an investment adviser like me, you might be offended by his warning to youngsters to steer clear of investment advisers as if they were hardened criminals (those are actually his words, though, of course, he’s an investment adviser too). But Bernstein’s advice to start early and keep it simple is good – and so is his reminder that preparing for retirement takes discipline and acting with “purpose and vigor.”