To protect identity, we will use the name Mary. Mary is maybe ten years away from retirement. She has consistently saved for her whole life. Setting aside a little bit of each paycheck and putting it in the bank or CD was her idea of saving for retirement. Mary failed to understand the math required to become retired. In all reality, the savings Mary had were dismal. Her contributions to her 401k were totally inadequate. Mary is a close friend of mine. She is one of the most kind and helpful people I know.
Mary thought she was financially crushing it. She had her house paid off and had no debt. In her mind, she was totally financially stable. But how long could she live without a paycheck? She didn't know. She didn't understand the math. She knew that staying out of debt was important, but she didn't know how to make money while not working. Her investment skills were non-existent. Mary believed that things would work out since she worked hard, stayed out of debt, saved a little money, and was a good person. Money doesn't care about your feelings. If you fail to plan, you plan to fail.
When Mary and I sat down and started crunching numbers, she quickly knew she was in trouble. Her total countenance changed. Retirement wouldn't be all that great because she wouldn't be able to do much. She will likely be required to continue working part-time when she should have been retired. Her plan is to not live long. She hopes she won't make it past age 80. Why live to be old, broke, and in bad health? This is now how she views retirement. It is sad.
Life's greatest adventures should take place in your golden years. Maintaining relationships, travelling, and service are noble retirement plans. If you have no money, you are forced to work and can't focus on much else. Never assume you will find financial freedom in your 60's without planning for it. Statistics show that the aging workforce is inadequately prepared to retire with their current lifestyle.
Unfortunately, Mary won't have much money in retirement. She didn't understand the simple, yet powerful concept of Time Value of Money (TVM). TVM helps individuals know how much to save each month to hit a certain target at a future date. If Mary understood this concept, she would have changed her investment strategy. She would have increased her contributions and not put her retirement money in a savings account earning no interest! Her plan could have been adjusted. Now she is very close to retirement age without much saved.
It breaks my heart to see someone work so hard in life to have no financial wealth to show. Mary will be forced to retire poor because she didn't understand basic facts. Don't let this happen to you. The TVM equation can be rearranged to solve any variable. The below chart shows some powerful truths. Download the file at the bottom of this article. Play around with this equation. You will quickly understand how powerful this equation really is. It will change your life - especially your quality of life in retirement!