Retirement Planning: The Camel’s Nose
The nomad and his camel
Have you head the old story about the nomad and the camel? It’s a cold night in the Arabian desert. The nomad sets up his tent and fall asleep inside, but is soon awoken by his camel who asks for permission to put his nose inside the tent to protect the sensitive nose from the cold and the wind. The nomad agrees, and goes back to sleep.
Later that night, the camel has a new request: Can he be allowed to put his whole head inside the tent? Since it is cold outside and the nomad feels sorry for the camel, he agrees and allows the camel to put his head inside the tent.
The next time the nomad wakes up, the camel has pushed his forelegs inside the tent. When he notices that the nomad is awake, the camel accurately points out that it is impossible to close the flap of the tent and how cool air is drifting in through the opening. Wouldn’t it be better if the camel would come all the way into the tent, to make it possible to close the flap and retain the heat? The nomad agrees, and is now sharing his tent with a whole camel.
The next time the nomad wakes up, he is outside the tent in the cold and the camel is sleeping alone in the tent.
Your retirement planning
When it comes to retirement planning, many of us have an endless amount of excuses as to why we aren’t setting money aside for the post-work years of our life or why we are only saving very small amounts each year.
When I’m young, I can only see the front of the camel’s nose sticking through the opening of my tent and it can be difficult for me to fully comprehend the long-term results of my actions. Getting a grip on the situation while I’m still young is a great idea, because setting aside 5% of my yearly income can have a huge impact due to compound interest and the ability to weather out economic cycles. However, with only the “nose” of my old age being visisble, I might be highly tempted to ignore it and spend my money on other things instead.
As I grow older, my old age will stick its hole head into the tent, but it is still just a head – not a a whole camel. I will be tempted to spend my money on more pressing things, such as buying a home or having an elaborate wedding.
Eventually, the camel has gotten its front legs into my tent, but I keep ignoring him. After all, shouldn’t I prioritize putting money into the kid’s college fund? And we need to get a bigger home to accommodate our growing family, and a bigger car, and…. Saving for retirement just have to wait. Maybe I could even borrow some money from my 401(k)?
When a whole camel is snoozing next to me in my tent, I start oscillating rapidly between a growing sense of panic and may hold habit of making excuses. I despair. The whole camel is already in, is there even anything I can do at this point? Isn’t it all too late? Why should I even bother? And you know – there isn’t any plan available at the place where I work and learning the ins and outs of a Roth IRA just seems to complicated right now. I don’t have the time nor the energy to deal with a camel at the moment, I just want to get a good night’s sleep in my ten. This isn’t my fault. The came just forced it’s way in.
Then, in the blink of an eye, I’m retired and I wake up freezing cold outside my tend with hardly any money.
I have more wiggle room in my tent when it’s just me and the camel’s nose, as opposed to being squeezed in next to 1,000 lbs of tired camel. If I don’t make smart decisions throughout my life, the camel will eventually be able to kick me out of my tent.
However, there is no reason to play the defeatist card and just move out of my tent when I notice two came legs inside it. There are a lot of things I can do, and every little bit counts.
Many of the steps wont even cost me any money, just some time and effort. I need to educate myself about the various opportunities, rules and regulations in order to make the smartest possible decisions with my money. Two persons, of the same age, setting aside $200 a month for retirement can end up with two drastically dissimilar nest eggs due to making different choices along the way. It’s not just about how much money you can manage to set aside; it’s also about how you go about doing it.
Some people erroneously think that just because they can only afford to save very little for retirement each year, there is no reason for them to educate themselves about the pros and cons of various investment alternatives. I hold the opposite view – if I can only set aside very small amounts, it becomes even more important for me to really get the most out of those investments. The guy who can afford to make big contributions to his retirement plan each year will probably come out on top one way or the other and enjoy a great quality of life upon retirement regardless of weather he makes optimal investment choices or not. The guy with the tiny annual contributions? He really needs to make sure that each penny saved is saved in the best possible way. He only owns one small tent and he can’t afford to let the camel kick him out of it.
Handling the camel after the age of 50
If you wake up after your 50th birthday with a whole came in your tent, don’t lose hope. There are still plenty of things you can do to remedy the situation. Giving up and just snuggling up next to the camel, accepting that it will kick you out eventually, is not the solution.
For starters, once you have reached the age of 50, the rules governing your own contributions to your 401(k) and Roth IRA are different. You can contribute more than you could before, and still get the preferential tax treatment. Sure, coming up with that money won’t be easy, but with the camel staring your down from within the tent, you might be willing to make some drastic lifestyle choices to avoid getting kicked out of the tent within 15 years or so.
A word of caution: Some older investors feel compelled to take on more risks with their investments, in an effort to compensate for the fact that they are now so close to retirement age. They feel that they must put their money in potentially high-yielding investments even when they come with very high risks, because how will they otherwise get together enough money in the few years left until the end of their work-life?
Generally speaking, the decade prior to your planned retirement is not the ideal time to do high risk investments with money you can’t afford to lose. Unlike a 35 year old investor, you don’t have much time to allow your portfolio to rebound after a crash. You can still do high-risk investments, but they should only be a fraction of your investment portfolio. If they are doing poorly when you hit 65, you can give them time to rebound while you survive on money hailing from more low-risk investments.