As I shared in a previous article, I decided to retire from my full-time paid position a few weeks ago. I will do an article about how my "transition" to retirement is going and what I am up to in a future article.
In this post, I want to share the main lessons I have learned, either from my own experience (and especially through my mistakes and failures), and from other sources (such as Larry Burkett, Dave Ramsey, Ron Blue, Randy Alcorn, John Piper, and others). It is the things that I have understood, embraced, and tried to live out as I have endeavored to be a wise steward of all that God has entrusted to me, particularly the most important things to do to prepare for retirement.
Because I had my first job at age 15, and I have worked at least part of every year since I have been working for over 50 years. I became a Christian at age 19, so I started my stewardship journey over 40 years ago. But it is important that I let you know that I did very few of these things particularly well, if at all, in the early years of my Christian life. I didn't get serious about stewardship until I was in my 30s and 40s.
Most of what I list here are basic stewardship principles. But that's the point – it isn't complex, but neither is it easy. It takes diligence, sacrifice, and perseverance, and especially God's grace. With that said, let's get started.
Your career is a gift from God and one of your greatest assets, so have great respect for whatever you did to earn money to live on, give, and save. As I look back on my life, I had two careers – one in social work and another as an IT professional in the financial services industry. Although they were very different, they both required me to use the same asset – my human capital. You have the same asset, which is the total of the skills, talents, and abilities that God has given you or provided the opportunity for you to acquire. This asset, if used wisely, will generate a relatively steady stream of income for 30, 40, or perhaps 50 years. So you need to manage your career well and protect your greatest asset with adequate disability and life insurance. It will, hopefully, provide many opportunities to enjoy the enjoyment and satisfaction that comes from hard work as it images the Creator, as well as the opportunity to do good to others. This is one of the things we were created for.
Credit card debt (and other forms of revolving credit) hold your money hostage and make you a "slave to the lender." I have been debt free (including my house) for a long time now, but that wasn't always the case. I have been in debt – and not just for a mortgage, but also auto loans and credit cards. I hated it, but I often viewed it as a necessary evil. But at some point, I realized that the money needed to service my debt each month couldn't be used for other things like giving and saving. Debt can be a heavy burden that causes stress in our finances and relationships. Therefore, I recommend that you avoid most debt, and if you have it, use the "debt snowball" to pay it off as soon as possible.
Live below your means. This area is one where I have generally done okay, but there were times, especially when I was younger when I was over-extended. The problem was that as I made more, I spent more, and sometimes more than what I made since I was reasonably certain that I would make even more in the future. Over time, I came to understand the folly of this and starting to be deliberate about spending less than I made. I started setting a "target spending level" and try to maintain it no matter how much my income rose. I found that one of the best ways to do that is to keep your "fixed expenses" in check. For example, instead of buying new cars, I tried to buy cars that were at least 2 to 3 years old and to pay cash, then drive them for at least 5 or 10 years. I also purchased less house than what the mortgage company said I could "qualify for" and tried to keep my housing expense (PITI) at 28% or less of my take-home pay. About 20 years ago, I switched to a 15-year mortgage and was able to pay it off in about ten years, so I have lived debt-free in my current home for the last ten years. And I can tell you this: it's GREAT to be able to head into my retirement years with a paid-for house!
Having an emergency fund is indeed one of the best financial moves you can make. I had an emergency fund long before I heard about it from Dave Ramsey. But I also know how hard it can be to come up with the money to fund it. Having cash on hand when the unexpected happened has been a blessing to my family on more than on occasion. In a world filled with uncertainty, having a fund that will tide you over for at least 3 to 6 months can be just the thing that separates you from having to take on a mountain of debt when the unexpected happens.
Keep your financial life as simple as possible, but no simpler. I have tried to minimize the number of checking, savings, and especially investment accounts I have to manage. I have had 401(k)s accounts with past employers and have consolidated them into a single IRA. I do all my banking with a single institution, and instead of multiple savings accounts, I keep track of "virtual accounts" using Quicken. I pay most of my bills electronically and automatically if I can. Since I have retired, I am looking for more ways to put as much of our financial life on auto-pilot as I can. One reason is that I want to make things as simple as possible for my wife and family should something happen to me. (By the way, in addition to a Will and other final documents, I maintain a document I call "A Letter From Your Husband Who Is Now In Heaven" for my wife and those who might assist her if I am unable to manage our affairs for any reason. It has all of our account information, passwords, etc. I would strongly suggest that you do something similar.)
Employer defined contribution plans (401(k), 403(b), etc.) are one of the best ways to save for retirement. I didn't enroll in a 401(k) plan until I was in my late 30s. IRAs were pretty new, so I didn't contribute to one of those until later. Nowadays, most employers offer a retirement savings plan, and anyone with earned income can open an IRA. So, when someone wants to give you free money, such as an employer match of some percentage, take it by contributing at least enough to at least max out the match. If your employer matches your 10% contribution with an additional 3% that is like getting a 30% return! If you want (or need) to save more, open an IRA (Roth is preferred) and fund it at some level every year in addition to what you need to save in a 401k or similar workplace plan to get your employer match. And remember, your spouse can have an IRA even if they have no earned income.
Start saving when you are young, and when you're older, you will be glad you did. As I stated above, I didn't save much at all for retirement in my 20s or early 30s, but I wish I had. That's because of the "magic" of compounding. The math of compounding suggests that when you start saving is more important than how much you save. So start as soon as you can and make things as simple as possible—use payroll deductions to your employer's retirement plan and automatic funds transfers from your checking account to your IRA. Consider using any "windfalls," such as inheritances or bonuses, to add to your savings or to pay down your mortgage (and remember to give!).
Your retirement savings is one of several byproducts of your career; don't disrespect that effort by managing them unwisely. I have always been a fairly conservative investor. My 401(k) and IRA were typically invested in a "balanced" portfolio of 60% stocks and 40% bonds. I sometimes wonder if I should have been a little more aggressive when I was younger. That because, when you first start, your investing time horizon is not months and years, but many, many decades. If you can stay focused on the long-term instead of the daily market headlines and let a wisely constructed, well-diversified portfolio capture market gains over your lifetime, you should do okay. When the market is way down, take a deep breath and use it as an opportunity to invest at bargain prices. And remember, the goal is not to become "wealthy," it's to be able to sleep at night while you're investing and then to have sufficient resources to pay your bills when you retire. If you are fortunate to have more than what you need, then you can use it for some occasional extras (focus on fun experiences instead of "things"), but most importantly, to be more generous.
If you are young, you can probably take a little more stock-market-risk with your investments than you may feel comfortable with. As evidenced by my balanced portfolio strategy, I have always been fairly risk-adverse. We are all wired differently when it comes to investment risk; the key is to get in touch with your risk tolerance. That said, there is a tendency for younger investors to be overly risk-averse. I get it – they have seen more than their fair share of market volatility and one major meltdown during their short lives. Nonetheless, you may want to take a little more risk that you think you can handle – you can always ratchet it back later if you can't. The stock market will occasionally go down a lot and may scare the living daylights out of you. It has happened many times before (several in my lifetime) and I promise will happen again. Your ability to control your emotions when others aren't will be a huge determinant of your long-term investing success or lack thereof. If you come to realize you are too afraid of the stock market to invest in it, that's OK, but you will need to be prepared to save a lot more or work a lot longer.
Many financial advisors are OK, but a great advisor will absolutely have your best interests at heart. I have never used a financial advisor, but that doesn't mean that I never will, and it indeed isn't to suggest that you shouldn't. Most people would benefit from an advisor's help (I prefer the fee-only "fiduciary kind," not those who are paid by commissions), if for no other reason than to talk them off the cliff when the going gets tough. On the other hand, it is not possible for that advisor to care about your money more than you, so you may want to consider managing your finances and investments, but only if you are up to the task. If you are going to be a do-it-yourselfer, care enough to have at least some regular engagement with markets, investment strategies and products, and your portfolio. But don't overdo it; if you're looking at your account balances every day, you've probably gone too far. That could make you want to start "tinkering" with things, which usually ends badly.
Giving is the most rational thing you can do with money. (Credit to my friend Drew for this quote.) This one is one that I can honestly say I have been consistent with for my entire Christian life. There has never been a time when I was not giving. I may not have given as much as I wanted at times, but I gave something. My commitment to giving is based on many things – the values, beliefs, and convictions that I have had all of my Christian life: First, it is an act of stewardship; it is the highest use of the money God has entrusted to us. Second, giving to others will always make you happier than hoarding it for yourself. Third, Jesus himself said: "Give, and it will be given to you." (But be careful with that one; if you give to get, you have missed the whole point.) Fourth, giving is one of the primary ways we image the goodness and kindness that God has shown toward us. Fifth, giving is one of the ways we support gospel mission and the expansion of God's Kingdom on earth. Finally, giving is an act of worship. We express our gratitude and thankfulness toward God when we give. Make giving a habit that you never break and increase your giving as your income increases. You will be blessed in ways you can't even imagine; not just monetarily, but also the peace and joy that it brings to your soul.
Take the time to learn how Social Security and Medicare work, long before you are ready to retire. I just went through the whole process for my wife and me, and it was far more complicated than I realized. (I had even written about it before on this blog and thought I had it all figured out.) The whole application process is not as straightforward as they lead you to believe and it is exacerbated by the fact that there are so many claiming options for Social Security and a myriad of choice for Medicare Supplemental Plans (Medigap plans), Medicare Advantage Plan, and other supplemental plans for prescription drugs, eye care, and dental. Plus, the process of applying and getting approved for benefits may take longer than you think. My advice: at least a year before you think you might retire, learn all you can about both Social Security and Medicare. Once you decide to retire, start the benefits application process at least three months before your planned retirement date. I did all of ours online, and in retrospect, I would have done it on the phone with a person – I think that would have made things go somewhat smoother.
Make sure you can afford to retire before you pull the trigger. As I wrote previously, this is something I spent a fair amount of time on. In addition to figuring out if I could afford to retire, I also needed to come up with a plan for how I was going to convert my savings into a regular paycheck (one of the bigger challenges that all retirees will face). I have read and written extensively on the concept of "safe withdrawal rates," and I would suggest that you do the same. Above all, remain flexible and be prepared to adjust your withdrawal rate and also your spending in retirement when conditions warrant.
Insuring ourselves against various kinds of financial risk is essential. Many of us think about what would happen to our families if we were to die young, and rightfully so. For that reason, I had term life insurance coverage through my employer and also a personal 20 year fixed term policy. This is an important concern, but we should also think about what might happen should we live much longer than expected (what is commonly called, "longevity risk"). In retirement, you will need a plan to prevent you from outliving your money. Delaying Social Security to get a larger monthly benefit is one way, as is purchasing immediate income annuities. I waited until my "full retirement age" of 66 to start receiving benefits. I haven't purchased an annuity, but I am fairly sure that I will annuitize some percentage of my savings in the future. I have also learned how important it is to learn about income distribution strategies in retirement and "safe withdrawal rates" as I mentioned above and decide on one that will work for me.
To save money, learn as many handyman and mechanical skills as you can. I am a lousy handyman and an even worse mechanic. I try sometimes, but I wish I had taken more time to learn how to fix a leaky pipe, replace a light switch, and tune-up a car when I was younger. I can do most of those things now, but I'm sure I always make it a lot harder than it needs to be. Over time, I have also learned not to spend any more time on the roof than I have to. (Once I got into my 60s, I decided to stay off the roof all together as what took two weeks to heal when I was 20 will take two months now if it ever heals at all.) Finally, never underestimate the utility of duct tape.
As I said at the beginning of the article, I didn't get a firm grip on biblical stewardship and planning for retirement until I was well into my 30s and 40s. I was faithful to give and tried to stay on a budget all of my life, but I also had too many car loans, a few credit cards, and bought more house than I should have once or twice. Fortunately, I was able to make some course-corrections later in life before it was too late.
But here's one final big lesson that I have learned: No matter where you are in your stewardship journey, if you need to make changes, you can always decide to follow a different path. It may take time to recover from and redeem the mistakes of the past, but don't let regrets over past failures and mistakes define your future. Remember the words of Paul the Apostle from Phil.3:13-14:
Brothers and sisters, I do not consider myself yet to have taken hold of it. But one thing I do: Forgetting what is behind and straining toward what is ahead, I press on toward the goal to win the prize for which God has called me heavenward in Christ Jesus. (ESV)
God has called us to a life of faithful stewardship. May his grace enable you to do all that he has called you to do as you seek to honor, glorify, and obey him.