Think you need millions for retirement? Maybe not, says finance professor
KALAMAZOO, Mich.—“It’s never too early to begin saving and planning for retirement,” says Dr. Onur Arugaslan, professor of finance. “Thanks to the ‘power of compounding’ as we call it in finance, even humble deposits grow to significant amounts over a long investment horizon.”
He recommends that individuals start their retirement planning as early as possible, saving and investing when they can and as steadily and intentionally as possible. Index funds—mutual funds or exchange-traded funds—are available for investors willing to assume market risk. And as people age, they should move their assets into less risky investments such as bonds.
In terms of the pitfalls that people can fall into when it comes to retirement, waiting to think through a retirement plan and an associated lifestyle is the most common. “Postponing retirement planning until you are in your 50s is a big mistake,” says Arugaslan. “Investing in middle age may not give you enough time to build a decent retirement nest egg.”
Another common misconception that Arugaslan points to is that Social Security will provide a comfortable retirement. He notes that ever since the beginning, Social Security has been intended only as a safety net.
“I do not think that the government will allow Social Security to become insolvent. However, they may increase the upper limit on Social Security income, raise the payroll taxes (which currently sit at 6.2%) or increase the age when you qualify for Social Security benefits.”
He notes that growth in Social Security is also highly dependent on long-term population growth through births and immigration, and policies that support more labor participation. In any case, he counsels that U.S. citizens should not rely on Social Security alone and plan for additional resources in retirement.
It’s common to see articles in business publications and others forecasting what is recommended in terms of retirement savings—these projections often exceed a million dollars or more per person in a household. But beware! If you read the comments attached to any of these articles online, you will find people who argue the projections are way too high or far too low.
“These projections are based on expectations for inflation, interest rates and asset returns in the future,” says Arugaslan. “They are also heavily impacted by retirement lifestyle and location as well as life expectancy. Given the uncertainty about all of these factors, people should have low confidence in any projection for the total needed to retire except for a specific financial plan tailored to their income, lifestyle and personal circumstances.”
One of the variables that is top of mind for current retirees and everyone active in the workforce is inflation. According to Arugaslan, “Persistent inflation will hurt everybody, including retirees. Delaying retirement and cutting spending if you are already retired should be considered. The Federal Reserve has been combating inflation by raising interest rates and limiting the money supply. Retirees and workers close to retirement should take advantage of these higher interest rates that are also reflected in higher bond yields.”
On the positive side, inflation has gone down from 9.1% last June to 4.9% this April, which is a good sign. However, there is still some time before we return to the long-term average of 3.3%, Arugaslan says. ■
Arugaslan has some parting pieces of advice about retirement planning and fiscal fitness in general:
- At the Sanford Center for Financial Planning and Wellness in the Haworth College of Business, trained student interns provide financial coaching to WMU students, especially in the areas of budgeting and debt management, for free. WMU Haworth is 100% committed to introducing financial planning as soon as possible to aid all WMU students in financial decisions.
- Don’t assume that you only need a financial planner if you have a lot of money. In fact, financial planning is useful for everyone. It involves not only retirement planning and investments but also insurance planning, tax planning and estate planning, among other important financial considerations. Many financial planners provide pro-bono advice to people at all income levels.
- Plan for the distribution of your retirement savings in a way that will minimize taxes while lasting for the rest of your life, if at all possible.