Avoid pitfalls by preparing
PLANNING | Things you should avoid to ensure secure retirement
Some statistics indicate that only four out of every 100 people are financially independent when they reach retirement. In other words, they don't have to work if they don't want to.
The statistics are the result of what I call the "eight great barriers" to retirement. Overcome these obstacles and you will have made a quantum leap on the road to financial independence.
1. LACK OF A PLAN. Until you have a plan, all your dreams and wishes are just that -- dreams and wishes. You have to have a specific goal with specific deadlines. For example, "I want to be financially independent at age 65 and be able to live on $3,000 per month."
2. IGNORANCE. You have to get over your math phobia and decide to become a financially savvy consumer. At the very least, learn the difference between simple and compound interest, or the concept of the time value of money. In less time than it takes to plan your annual vacation, you can pick up knowledge that will benefit you for life.
3. TOO MUCH DEBT. Thanks to the easy availability of credit, a lot of people have maximized the use of credit cards hoping that higher income in the future will take care of their monthly payments. Guess what? That day never arrives and they just get deeper in the hole. The best solution is to use credit cards for convenience and never to buy something on credit that you cannot afford to buy with cash right now.
4. BAD INVESTMENTS. This could be another term for speculation. Trying to get rich overnight because a neighbor got lucky is never a good strategy, and you could be in real danger of losing the entire amount of the investment. Never, ever gamble with your "serious" money.
5. LACK OF PROTECTION. Just because you don't like insurance does not mean you have to go without any. You have to understand the financial implications of a catastrophic event devastating your life and the lives of your loved ones.
6. INFLATION. Most things will cost more in the future than they do today. That's inflation, and it affects everybody. If it costs you $3,000 per month to retire in 2007, it could very well cost you $5,000 per month by 2017. So if your sources of income can provide for you now, will they be able to do the same 10 years from now? This is one of the main reasons why retirees run into problems in their later years.
7. INCOME TAXES. By the time you are done paying federal, state, local, Social Security and Medicare taxes, you will find that your income has been cut drastically. If you will need to have $3,000 of income per month to survive during retirement, it could very well turn out to be more like $4,000 a month before taxes. Taxes make a substantial difference and could devastate your retirement resources.
8. PROCRASTINATION. Most people put off all action until that one magical day in the future when everything will be perfect to start on the road to financial independence. That day is never going to come, and they know it. If you are 25 and you want to have a million dollar nest egg by age 65, you will need to invest $2,055 per year at an annual return of 10 percent. At age 45, the amount increases to $12,392 per year. Time is indeed money.
F. Bill Billimoria is a certified finan-cial planner and chief investment officer of Summit Wealth Management, Chicago. He's the author of On Golden Pond ... Or Up the Creek: Making the Right Choices for Your Retirement Security ($21.95, Synergy Books, 192 pages).