There are two phases in the financial journey of every person. The first phase is the phase of accumulating enough assets to live the second phase when we live on the accumulated assets. Some people can arrange their lives in such a way that the second phase of retirement is not purely retirement but semi-retirement in the sense that they do something which continues to bring them money but they are actually not working in the sense of what working usually means. But not everybody can do this.
There are two important things that one should know on this financial journey:
- Compound interest is very powerful and the earlier you start you are likely to make more money
- How much money you save is far more important than how much you earn. This means you should live below your means and accumulate a lot of net worth rather than just earning a high income and spending it all.
It is very important to plan for this journey, because if you fail to plan, you are planning to fail. When you plan you need to take into account the risks of retirement.
- Inflation risk: One of the most important risks is inflation and the assets you accumulate and use during your retirement should help you fight this enemy who is definitely going to be there.
- Longevity risk: We live longer lives than in the past and our assets should last this longer life-span.
- Health/long-term care: When we live for a long time, these issues are very likely to crop up and you need some sort of a safety net for these needs.
- Market risk: When you invest in stocks and bonds, they can go down and remain down for a long time. The plan you make should account for this risk.
- The sequence of returns: How the market and investments you have accumulated perform during your retirement will also determine how good or bad your financial situation can be during your retirement.
- Withdrawal sustainability: You cannot withdraw too much each year for then your pot of gold will become empty sooner than you think.
- Taxation: It is important that your plan avoids taxes as much as is legally possible and that is where tax-deferred accounts come into place.
- Legacy: Ideally, you want to leave a good amount of assets for your heirs or for charity and that should also figure in your financial plan.
The retirement pot that you accumulate should hopefully fill all your needs: essential expenses, joy expenses, goals that you may want to achieve and also leave a legacy in the form of financial assets for your heirs and charities.
In most cases, the investing plan would consist of a low-cost globally diversified portfolio made of equities and bonds via index funds but may also consist of actively managed mutual funds managed professionally and well. However one needs to disciplined and do ordinary things like saving and investing regularly for a long, long time( for example-30-40 years). That is what makes the ordinary things remarkable and that is what leads to success.
It is also important to remember that life is not about money and real wealth is what you become through life and not what you accumulate. How you climb a mountain is more important than reaching the top. This story illustrates:
A group of alumni, highly established in their careers, got together to visit their old university professor. Conversation soon turned into complaints about stress in work and life. Offering his guests coffee, the professor went to the kitchen and returned with a large pot of coffee and an assortment of cups – porcelain, plastic, glass, crystal, some plain looking, some expensive, some exquisite – telling them to help themselves to the coffee. When all the students had a cup of coffee in hand, the professor said: “If you noticed, all the nice looking expensive cups have been taken up, leaving behind the plain and cheap ones. While it is normal for you to want only the best for yourselves, that is the source of your problems and stress. Be assured that the cup itself adds no quality to the coffee. In most cases it is just more expensive and in some cases even hides what we drink. What all of you really wanted was coffee, not the cup, but you consciously went for the best cups… And then you began eyeing each other’s cups. Now consider this: Life is the coffee; the jobs, money and position in society are the cups. They are just tools to hold and contain Life, and the type of cup we have does not define, nor change the quality of life we live. Sometimes, by concentrating only on the cup, we fail to enjoy the coffee. Savor the coffee, not the cups! The happiest people don’t have the best of everything. They just make the best of everything. Live simply. Love generously. Care deeply. Speak kindly.
And when you invest, your worst enemy is likely to be yourself. Over multi-decade periods markets have almost always gone up. In the short run, they can go down and the short run can sometimes be a few years or even a decade. There is no way to predict what will happen. But if we keep calm and keep investing regularly, we are likely to be okay. On the other hand, if we try to predict what will happen, we are likely to fail. You need time for the sapling to grow into a tree and if you keep taking the sapling out, you will never get a tree. That is why patience and discipline are so important. That is why investing is simple but not easy. But living in this spirit will bring joy and joy is the essence of life.