There Is No Ideal Time to Contribute to Retirement

“Do you really think you should be voluntarily putting money into your retirement account?  It just seems like there are so many other things you could be using the money for right now.  Why don’t you wait to contribute to your retirement until you get more financially stable?”

Recently, I was lamenting our financial situation to a good friend.  I just had a dental procedure at a periodontist, I was just told my 6 year old has 8 cavities (that’s another story) that will cost $400 out of pocket to fill, and that my 10.5 year old will need braces to the tune of $5,000 or so.

Add on top of that the fact that our car has 150,000 miles on it, and we refuse to borrow for a new one, and well, I’m looking at a lot of financial stress.

Still, these expenses don’t have to be paid immediately.  I’m saving money every month for a new-to-us car when our old one finally gives out.  I may be able to wait a bit to get my son braces.

I just wanted to vent a bit to my friend and express my frustration.

I was really surprised by her answer.  She simply couldn’t understand why we would contribute to our retirement when we have so many impending expenses.

Yet, as Tracy Chapman sings, “If not now, then when?”

Good Time to Contribute to RetirementThere’s no good time to save for retirement.

You could always use the money for something else.

When my husband and I were newly married 14 years ago, I made a little over $30,000 a year.  We lived in the suburbs of Chicago, which wasn’t cheap.  My husband was a graduate student and didn’t work.  We were flat out broke.

And my employer had a mandatory rule that 8% of my gross income would go to my retirement savings.

I HATED that rule.  There were so many other things that I could have used that money for, but I had no choice.

Eleven years later, when I left the job and walked away with 11 years of retirement savings at 8% of my gross salary plus an equal match by my employer, I was ecstatic that I was forced to save for retirement.

Now, my husband is working for an employer who has the same rule, and we’re happy that 8% of his gross salary goes to his retirement account.

We’ve learned our lesson so well, in fact, we are also contributing to our Roth IRA even though money right now is T-I-G-H-T.

But really, for most Americans, money is almost always tight.

I would rather scrimp and save now, while we still have many working years left before retirement than scrimp and save during retirement, constantly worrying if I had enough money to last me until the end of my life.

So, no, my well-intentioned friend, I don’t think I should stop contributing to my retirement.  In fact, there’s no better time than now to save for retirement.

If not now, then when?

Do you continue to contribute to your retirement when facing large expenses, or do you wait to contribute until your finances improve?

The New Retirement

I recently had the chance to chat with Todd Tresidder.  If you don’t know the name, don’t worry.  Up until about a year ago, I didn’t either.  But, the short of it is that the guy is retired.  In fact, he retired much earlier than most will.  At the ripe “old” age of 35, he retired.  Which must mean he’s off golfing around in the Arizona heat, right?  Or down, sipping OJ at some southern Florida retirement village?  Not likely.

Todd is retired in the sense that he doesn’t report to a boss.  He does what he wants, when he wants to.  One of the things that he wants to do is write books that help people like you and I become better financially.  He’s got several that he’s written so far, and I’m sure he’s working on more.  During that first meeting, Todd and I spoke for a while on retirement.  Speaking with another financially minded person, I usually expect to hear people talk about 401(k)s, IRAs, and stock purchasing.  I don’t discount those tools, but I just don’t feel that, like Social Security, you should be depending on them for your whole retirement.  Surprisingly, Todd agrees.  The longer we spoke, the more we found that we agreed on.  At the end of our conversations, Todd offered me a copy of his book on retirement. I accepted.

How Much Money do I need to retireLong story short, I finally read it.  It took me a while, but I’m glad I got around to it.

If there’s anything that stands out about the book, is that Todd knows what he’s talking about.  He’s got the experience behind him to talk about the subject in an informed and educational manner, and technically, probably knows more about some of his subject matter than I ever will.  He spends the first several chapters of the book dispelling a few myths about retirement, and about the way in which most people tend to think about it.  He then takes off on a few chapters of some of the math and logic behind the different ways of calculating your retirement needs, and calculating that mythical “number” that everyone seems to be seeking out that will indicate that they’ve saved all that they need to save for retirement.  Not only does that one perfect number not exist, he argues, but the calculations that we make to arrive at it are completely flawed.

The rest of the book is focused on what I like to call the New Retirement.  He goes into detail on the ways to properly estimate your income needs for the future, and then into ways that he believes (and I agree) that a properly diversified retirement “portfolio” should be structured.  I don’t want to spoil too much of the book so I won’t say much more.  What I will say is that the book isn’t terribly long.  It’s not a deeply structured manual on all the different retirement accounts.  And it’s not terribly expensive.  It’s $4.99 on the Kindle (free for Prime members), and about $10 in paperback.

Pick up a copy of How Much Money do I need to Retire at Amazon.  You can check out Todd’s site as well as the other books he’s written at FinancialMentor.com.

 

Embrace Peer to Peer Lending

Imagine it is Monday morning. You just had a great Sunday with your family, doing chores around the house and watching a movie together. But now you are back in the literal driver’s seat, and on the drive to work your mind begins to wander, cataloging the day’s tasks.

And then the urge hits you, that tempting nagging gently haunting concern about your retirement account. “Has it gone up?,” you think to yourself. “Oh no, maybe it is down.” You know it really makes no difference, but you realize you have not checked the mutual fund you are invested in within the last three days. You know things are probably fine, but you can’t help but wonder. After all, you and your spouse’s well-being for the next forty years is wrapped up in those tiny digits on your browser screen.

You sigh, wishing there were another way to do this whole investment thing.

The Toll of Volatility

The headache in the first section is the price we pay for trusting our future in the US markets. This is because the market contains what investors call volatility; it can dramatically rise and fall within hours or minutes of breaking news. The supposed benefit of this volatility is that, in theory, things eventually become more steady. Millions of people trust these markets to give them an eventual positive return on their investment. “Give the market patience,” common wisdom says. “Trust your hard earned savings 30 years at a time.”

Then you turn on the evening news and watch channels like NBC Nightly News devote weighty portions of their show to how the market is faring. “The DOW rose/fell today by 1.4%…”, a report will start. Why do they talk about it every day if long term returns are all we should focus on? Because of volatility; because they lack trust. The 2007-2008 financial crisis five years ago was the largest since the great depression, even causing something as steady as copper to rise and fall like a ship in a storm.

Copper Price History

[source: Wikimedia Commons]

When looking at the graphic above (the price of Copper over the past 25 years), it is no wonder that people struggle with checking their retirement fund throughout the week!

The Peace of Peer to Peer Lending

There are many non-volatile ways to invest outside the US markets, and peer to peer lending is one of these. Instead of being tied to the global market, rising and falling on a whim, peer to peer lending returns just steadily trickle in throughout the day.

Of course there remain some risks. Some have lost money. But if a lender remains diversified in at least 200 peer to peer loans, there is an extremely low chance they will experience a negative return. In a study I did in February, only four diversified peer to peer lenders out of 3800 have lost money on Prosper.com.

In contrast, you can bump up your returns by using savvy filters on the available loan pool. Examples of good filters to use target borrowers with are:

  • No past bankruptcies
  • 10+ years of credit history
  • 5+ years of consistent employment
  • 10+ total credit lines on their report.

Lenders who compile a diversified peer to peer lending portfolio out of borrowers like these experience much less volatility than investing in the stock market.

My Experience

I used to be like those folks who was tempted to daily check the status of my retirement mutual fund. Articles kept telling me not to, but I could barely help myself. Checking my account was like a financial version of pornography; it was a need that could not be satisfied.

Then I discovered peer to peer lending. Since then, I found the emotional ease I had been looking for. I am diversified in 200+ notes across both Lending Club and Prosper, so I worry little about the state of my accounts. My returns are refreshingly boring in contrast to the US stock market: they neither rise nor fall by the day, staying at a healthy 13% or more every single day of the year.

Yesterday was Monday, and (against my better judgment) I logged into my peer to peer lending accounts to see how things were faring.

Nothing had changed. I closed my browser window and called my Mom.