Don’t Let Magical Thinking Jinx Retirement Planning

retirement-magical-thinking

Fantasizing that the money will somehow appear isn't helpful. Here's what is.

Barbara Marquand
September 27, 2018

Fantasizing that the money will somehow appear isn't helpful. Here's what is.

Money for retirement won’t magically appear, although thinking it will can be comforting. You might put faith in a get-rich-quick scheme, fantasize a windfall, or trick yourself into believing that saving will get easier later.

But — poof! — the illusion vanishes, and you’re further behind.

Here are common “magical” reasons for not saving for retirement now, and how to break their spell.

'The universe will provide'

“I’ve heard this from countless people,” says Christina Empedocles, a certified financial planner with Insight Personal Finance in San Francisco.

The idea of the universe making everything OK is soothing when you’re afraid to contemplate how much to save. But without taking action, “it’s just delaying the inevitable,” she says.

Get real: “It’s great to have a big vision and faith there’s going to be prosperity in the future,” Empedocles says. “But be realistic in the here and now, so once that prosperity comes, you’re not backfilling a big hole.”

For example, say you’re running up credit card debt while waiting for a big promotion or business venture to take off. Make a realistic budget to live within your means now, so you won’t have to use all that increased income to pay off debt. Pair faith with a proactive approach, and face tough choices squarely, such as choosing a less expensive place to live.

'The market will go up every year'

“Despite two catastrophic bear markets in the past 20 years, people still think the market will magically return 10 to 12% per year over all time periods,” says David Metzger, a certified financial planner and founder of Onyx Wealth Management in Chicago. “It sets up for some risky expectations.”

Get real: The stock market’s average annual return is about 10% over the last century, as measured by the S&P 500, a benchmark that includes the 500 largest publicly traded U.S. companies. Some years delivered bigger gains, and some delivered losses. Understand how the components of your portfolio are invested and the returns you can reasonably expect for your time horizon, Metzger says.

A human financial advisor or robo-advisor can help you choose investments that match your risk tolerance and goals.

'I’ll inherit enough money'

“What happens if that money isn't there?” asks Charlie Horonzy, a certified financial planner and founder of Focused Up Financial in Chicago.

Relying on an inheritance is risky. Relatives may not be as well off as they appear. Nursing home expenses could wipe out their portfolios. Or they could leave their money to other people or charities.

Get real: Build your own nest egg. Can’t find money to spare? “Start with baby steps,” Horonzy says. “Get comfortable with saving 1% of your income. Once you’re OK with living on 99%, then save 2%.”

'I can rely on my home equity'

Some people think “their lack of savings is no big deal because they have home equity,” says Quentara Costa, a certified financial planner and founder of Powwow in North Andover, Massachusetts. “At the end of the day, you can’t pay the bills with a brick from your front stairs.”

You could sell the home and buy a less expensive place, keeping the difference. But for many people, “downsizing” is a lateral move, because they want nicer amenities and convenience, Costa says. “Their smaller condo may end up costing just as much as their original home, if not more.”

A reverse mortgage — a home equity loan you don’t have to repay as long as you live in the home — can provide money in retirement. But the loans aren’t for everybody, and they can be expensive.

Get real: Think about how you want to live in retirement and set savings goals accordingly. Use a retirement calculator to estimate how much you’ll need, and pour money into retirement accounts to get there.

'My business will fund my retirement'

“You put so much effort into [your business] and you just feel like ‘My baby is going to take care of me,’” says Sidney Divine, a certified financial planner with Divine Wealth Strategies in Atlanta.

But your business might not yield what you expect.

Get real: “You never want to put all your eggs in one basket,” Divine says. Take advantage of retirement plans for small-business owners, and build savings as you grow the business.

'I’ll save when I don’t have surprise expenses'

The car needs tires. The water heater breaks. Surprise expenses are part of life.

“It’s a lot easier to say, ‘Next year I’ll really buckle down,’” says Alyssa Lum, certified financial planner and founder of Luminate Financial Planning in Sterling, Virginia. “But there will always be something.”

Get real: Keep a log of home and car maintenance and repairs, and then build the expenses into your budget, Lum says. Then you’ll know how much you can spend on extras and still save.

'I'll save when I make more money'

Saving just a little now has a bigger impact than saving lots later.

Carol Craigie, certified financial planner

“This assumes that you won't have periods of unemployment, that inflation won't outpace your income and, most importantly, [that] time for savings to compound isn't that important,” says Parker, Colorado-based certified financial planner Carol Craigie, managing partner with Fiscal Fitness Clubs of America. “Saving just a little now has a bigger impact than saving lots later.”

Get real: Compounding happens when investments grow and the reinvested earnings generate returns, too. It seems like magic, but compounding takes time to fuel savings. Use a 401(k) calculator to see the power of compounding for retirement savings.

'I’ll win big on a sure thing'

Some people think financial planning and prudent investing are too slow. So they pin their hopes on a big idea, such as picking a great stock or flipping houses, despite having little stock market or real estate investing experience, says certified financial planner Abel Soares III, CEO of Hui Malama Advisors in Honolulu.

Get real: “There’s no safe bet or sure thing,” Soares says. But you can reduce stress and build security with a financial plan. You can make your own financial plan or hire a fee-only financial advisor to help.