TV commercials and newspaper ads extol the advantages of a 401(k) to build retirement savings. They paint a rosy picture of golden years filled with travel, hobbies, and fun activities, and talk about how, with the miracle of compounding, account balances can grow to six- and seven-digit sums. Don’t fall for it. They’re selling dreams.
Understand that there’s a big cost for retirement. You may need more than you realize to make your retirement plan work.
Many investors have a financial blind spot. They make plans for retirement and make investments, but then fail to match up the two. If you’re going into your retirement with $500,000 in savings, for instance, you’d better not have $1 million worth of retirement activities planned. The same applies to kids’ weddings, vacations, and other life events. Plans have to be funded from your savings and investments.
No, you can’t project costs exactly. Plans are ever-changing. But as you approach retirement, you must have a good idea of how much you will need to live the lifestyle you want. Then, you can determine whether your plans are realistic. That’s financial planning—not selling dreams.