Mistakes are very common with people who are planning their retirement. The list of things that I see over and over again always adds up to falling short with an individual’s retirement. No one group has a monopoly on retirement mistakes. But, I have found one group of individuals that, collectively, seem to be making a different kind of mistake based on their occupation and the way they think. That group is… you guessed it… Engineers!
Engineers have a way of seeing the world a little differently when it comes to a lot of things, especially retirement. Engineers may look at the world and try to apply a linear formula to figure out problems, something that is inherent to engineers. The fact is we live in a dynamic world. When you consider the economy, there are millions upon millions of input variables. It is impossible to really tell with certainty what is going to happen next with our economy; we see economists on the television all the time with their predictions but rarely are they accurate or consistent. That is because of all those input variables. So, for an engineer to try and apply their education to investing it makes for a frustrating experience.
I have compiled a list of mistakes that I see being repeated all the time with engineers and retirement. Again, engineers do not have a monopoly on mistakes. I have seen far worse. But, pointing these errors out makes it so that someone can see what mistake they may be making and correct them as quickly as possible. This way they can get on track to a retirement that they can accomplish.
This list is far from extensive, but it does point out some simple mistakes that can easily be remedied and get people on track with their retirement.
- Ignoring the actuary tables
How long do you plan on living? I ask that question, albeit tongue-in-cheek, but it is a question that gets people thinking about where they are. Then, I hit them with a fact that they never see coming: How long they actually will live. When you were born you had a life-expectancy rate. It was based on all the data the government has on how long you can expect to live. But, it is based on averages of all people born about the same time as you were born. Your life expectancy may very well have been about 78 when you were born. But, that does not mean that once you hit the age of 78 you wake up one day and you are dead.
That expectancy takes into account people who have died along the way throughout the decades. If you live through the first ten years of your life, your expectancy increases. That is how averages work. Live another decade and you are going to add more years to your life, on average. In fact, if you are between 45 – 50 your life expectancy is 98. That is because you have lived through those first 50 years and every time you pass a milestone in your age, your life expectancy increases more, albeit, at a smaller and smaller amount as time goes by.
But, this is to show that you are very likely to live a lot longer than you think. Most people have heard their average life expectancy long ago and just kept that number in mind, not taking into account the fact that they keep living. Despite engineers thinking in terms of concrete facts and data, they may have easily missed this consideration, a mistake engineers make with retirement.
Keep that life expectancy number in mind. 98 is a far bigger number than you may have originally imagined. But, the real kicker with that number is the fact that if you actually live to be 98 that is well over 30 years past the average retirement age. That is an incredibly long period of time. And, anything you have in the way of money has to last that long.
2. Don’t have a concrete plan
Like building a building or structure, you need a plan. You need a foundation to start with. There has to be a plan that makes sense and can work towards the goals set out. But, I have found that some engineers do not have a concrete plan, something that I find interesting considering that this is a group of people who work with structure their whole lives.
You will want to sit down with pen and paper and work out all of the details you need for retirement, the kind of life you want to lead, and then figure out how much money you are going to need to fund that life.
3. Don’t save enough
You need to save enough. That may sound as simple as the day is long. But, when I look at the statistics of what people actually have in their retirement, then show them how that money could be used, you should see the looks of disappointment that I get and the amount of work that needs to be done.
On average, at or near retirement age, the average American only has about $105,000 in their retirement account. That is far, far below where anyone will need to be with their incomes after retirement. I always tell people this: When you retire, you have no more income. That is the definition of retirement. Now, look at how much you actually have in your retirement account. How much do you have and how long do you think it will last?
Keep in mind you are going to need money a lot longer than you think, look no further than the paragraph above I wrote on actual life expectancy.
4. Thinking what goes up keeps going up
The market malaise that the world saw in 2008 has hopefully taught us all that what goes up does not go up indefinitely. The investing world has its limitations. And, lately, the swings we have been seeing are bigger and bigger. However, there is an average at play that helps to keep things into perspective. On average, the S&P 500 has returned 8.65% return from 2007-2016* on average. That is respectable. That is a number that can be used to apply to investing your funds with a program and see where you will be after a certain number of years.
But, that 8.65% is non-linear. The market goes up, the market goes down. It ebbs and flows with the economy. The 8.65% is an average. One year it may very well return 18%. But, in order to maintain that 8.65% average, the next year needs to see a return of nothing. That is how averages work. Engineers need to keep this in mind when they consider their retirement. This is a mistake that engineers make with their retirement, one I have seen repeatedly.
*Information obtained from: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html
5. Don’t start early enough
When I was in college, slightly more than a week ago, I had an economics professor that told me if I invested a small amount of money every single month, and let that money compound every year, eventually, I would be sitting on a sizable retirement account. But, there were a few variables. First, I had to be religious with my depositing these funds. Second, I needed to inflation adjust the amounts over the course of time. If I was going to invest $100 per month over the course of my entire working career, then 20 years after I started whatever $100 was valued at, based on inflation, that is the amount that I needed to continue to invest. After that 40 years of an illustrious career, I can expect to be sitting on well over $1 million in retirement. Sadly, I did not heed my economics professor’s advice. Like so many others in the retirement world, I started later. That meant that I needed to catch up, like so many people that I see come into my office.
The thing with engineers and retirement, they have that analytical way of thinking. If you were to show them all of this data, that they could really be doing well if they start early and stick with it, mostly they would apply this. That is one thing I enjoy about working with engineers, they see the end result early and see the long-term application that is necessary to get to that point.
6. Not taking free money
Free money? Why, yes. There is free money for retirement. Oftentimes employers will match contributions to retirement funds. You do not get a decreased salary with this. Employers just match what you put into your account, up to certain levels. That acts like a raise you will get later on in life. But, you have to actually contribute to your account in order to get those funds. That is the catch. I always push for this. Always! It acts as free money that you can’t spend for a really long time, but that is available to you when you need it most when you are retired and no longer earning an income.
7. Not maximizing tax deferral
You can save more than just what the 401k levels are available to you. The Traditional IRA allows you to save funds for retirement and do so in a tax-deferred account. You can take what you have earned through this tax deferral account and continually compound it throughout your working career. Then, when you start to draw on these funds you will pay the taxes that are owed on the accumulated earnings. This allows for a larger compounding rate, which you gain a tremendous benefit from.
Definitely take advantage of these kinds of programs. You will want to maximize what you can with your contributions to your 401k account and then, invest even more through your Traditional IRA Account. This will help you work towards your goals effectively. But, this is a mistake that I see engineers make with their retirement, not knowing what their maximum contributions are and what programs to implement to get them there.
Conclusion:
As I mentioned, no one group has a monopoly on mistakes they make with retirement. However, I enjoy working with engineers simply because of their analytical way of thinking. Then, if I can see a mistake any one individual is making, it is easy to point out that mistake and allow them to use that analytical mind to refocus their direction and get this person on track. Time is always the most important variable for retirement. Figure out your plan and make sure it works for your lifestyle. Then, maximize your opportunity to stay on track toward your goals for retirement.
*The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. Indexes cannot be invested directly.
