Two Irrational Behaviors That Will Ruin Your RetirementBy Steve McDonald, Bond Strategist,
The Oxford ClubTuesday, May 24, 2016
Steve McDonald says today’s $1.7 trillion retirement crisis is largely the result of irrational behavior. Every little bit matters, yet boomers continue to overlook the power of compounding. Prioritizing the present over the future is setting the stage for disaster.In today’s Two-Minute Retirement Solution, Steve shares the two small changes you should make right now to fix the problem.
Transcript:
We have about a $1.7 trillion shortfall in our retirement funding in this country. That’s how much we will need that we haven’t saved.
And there are two behaviors that most of us exhibit to some degree that are responsible for most of it. And thankfully, both are correctable.
The first is called “present bias.” We boomers are famous for this one.
The present bias involves putting your current happiness before your long-term needs and well-being.
You know, buying that 48-inch TV when the one you have at home works just fine and that $800 could go into your IRA. Or taking that expensive vacation despite the fact that you’re contributing only 3% to your 401(k) and you know that puts you on track for virtually nothing in your golden years.
It is a serious problem, especially in light of our longer life expectancy and the financial disgrace of Social Security. It is completely irrational – and a problem that will turn our retirement years into a financial nightmare.
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The second behavior is called “exponential growth bias” or, more easily said, failure to grasp the miracle of compounding.
It’s rooted in a limited view of how money works, and it has been exacerbated by the fact that we have been in an almost zero interest rate market for years.
It starts with the totally irrational belief that even if you can earn 7% on $100, that’s only $7 in one year. Better to spend it and enjoy it than earn a paltry $7.
What they’re missing of course is the time element. In 10 years, that amount doubles to $200. In 10 more years, you’re earning $27 a year on the original $100 you put aside.
That measly $100 is now generating 27% per year.
And if you look at the long-term returns of solid dividend-paying stocks that raise their dividends every year, the total returns are huge.
If you add a regular IRA or 401(k) contribution to the equation, which most retirement experts say should be at least 15%, the long-term magic of compounding and dollar cost averaging really kicks in.
This horrible retirement funding shortfall we have put ourselves in is fixable for most of us. Not all, unfortunately, but most of us still have enough time to correct some of the problem.
And in most cases, we don’t have a choice; it’s either change how we are doing things or spend retirement in poverty.
Shift your bias to savings and compounding now!
