I always enjoy features in MoneySense or the Globe and Mail where they profile a family, highlight their current money issues, then consult with a panel of financial planners for suggestions on what the family should do moving forward. Some time ago in MoneySense, they talked to a couple who worked, lived a frugal lifestyle, were paying down their mortgage on an accelerated schedule and fully funding their children’s RESPs, but at the end of the day had nothing left for retirement savings. They asked what they were doing wrong.
Most of us remember at some point seeing the chart or hearing the idea that if you saved $200 / month from your 25th birthday until you retired, you’d have more than someone who saved $400 / month from their 35th birthday until they retired. That’s the magic of compounding! Many of us see this type of thing and it motivates us that start saving early and often. HOWEVER, there’s another side to the issue.
It’s probably MUCH easier for the typical 35 year old to save $400 / month than it is for a typical 25 year old to save $200. As you get older, usually your earning power goes up, and at a certain point your expenses go down (once your mortgage is gone and the kids have left home). Even though you have less time for compounding to do its thing, you have the capacity to save more.
This was the response from the experts to the couple mentioned at the beginning of this post. They were already taking care of a number of big expenses, and the experts said they needed to put retirements savings on hold. With a paid off mortgage, and significant savings for the children’s education in place, at a later date they’ll be capable of directing far more of their income at retirement.
The other comment, which I also felt was worthwhile, is the experts warned that they shouldn’t live an impoverished life NOW to avoid living an impoverished retirement. As Buffett might say “it’s like saving up sex for your old age“.
I was talking to a friend in a roughly analogous position recently. She’s a mind-30s professional and opened an office in the last couple of years. She’s paying all the bills and funding her modest lifestyle, but doesn’t have a lot left for retirement savings or investing. When she was worrying about this, I told her that she should be patting herself on the back for having a successful business (that’s far beyond ramen profitable). Her financial focus right now is growing her business, which is what it should be. It will naturally compound and begin growing organically (word of mouth and all the marketing she has in place), at which point she can start directing more money toward retirement (and keep increasing this as her business grows).
This all certainly isn’t to say that saving (and especially retirement saving) is unimportant. If someone says they aren’t at a stage in life to be saving for retirement then buys a plasma television or an expensive furniture set, I’m not going to be able to get behind their decision. Instead, I’m saying that if you’re saving for your kid’s education, paying down your mortgage or investing in a business, you ARE preparing for retirement (just not using an RRSP).
Don’t beat yourself up.