When it is my turn to tell the bedtime stories in our family, I have a limited, but highly effective arsenal of tales guaranteed to make my daughter’s eyelids grow heavy and finally close within 10 minutes. I know nothing of hypnotism, but I am convinced that it is the cadence and the tone with which I read these stories that makes them so soporific.
One of Caroline’s favorites is The Little Engine that Could. It is the stirring saga of a small, underpowered steam locomotive that bravely volunteered to pull a long train over a high mountain, and could only accomplish the seemingly impossible task by repeating the optimistic chant, “I think I can-I think I can.” Sure enough, through hard work and positive thinking, the objective is met, and the little engine emerges a hero.
During our accumulation years, while we are still working and saving, we are called on to haul freight uphill, preparing ourselves for retirement. In our younger years, it may be a struggle to chunk away the money we know we ought to save. We are hard-wired for having fun. Every cell in our body and every neuron in our brain are thinking of ways to live beyond our means.
Then, along comes a family, and our resources seem to be stretched as thin as cheap cellophane. But, like the little engine that could, we give it a go. We chug along. We stick to the program. Then a magic thing happens along the way. Slowly but surely, we get something called momentum. Our capacity to earn becomes greater as we acquire more experience. Our little nest egg begins to grow exponentially. Because of compound interest, what started slowly picks up speed. Our money is begetting money. which, in turn, begets more money, until we are at last on top of our personal mountain saying, “I knew I could, I knew I could.”
The first few years of accumulating money are the hardest. After that, if we keep on accumulating and investing wisely, it gets easier. It’s a natural law of economics that the more we have, the faster it grows, especially when compound interest is involved.
But a word of caution here: If we are to arrive at a reliable retirement income, we must keep our eyes peeled for something called financial evaporation – the slow and often imperceptible disappearance of our assets that occurs when we aren’t looking, or aren’t looking closely enough.
All too often I have seen people build up a nice portfolio that took decades to acquire. They were counting on those retirement accounts to be there. Then, evaporation happened. Sizable portions of that reserve disappeared. Was it because they didn’t pay enough attention? Did they trust someone else, perhaps a broker, to look after things for them? Did they forget that as they grew older, their risk tolerance would change? Was their ship on autopilot when they should have been tending the wheel?
The best expression I have heard for making sure that evaporation doesn’t erode our retirement savings is “future proofing.” It reminds me of how we coat something with insulation if we want to weatherproof it. Future proofing boils down to adhering to one of the oldest rules of investing – the rule of 100. Just put a percent sign after your age. That is the amount you should have in a safe place.
What’s important is that a safety-minded approach will prevent you from risking money you cannot afford to lose. A competent financial advisor will be able to identify programs that are designed specifically for those approaching retirement.
Peter J. D’Arruda is the president and founding principal of North Carolina-based Capital Financial & Insurance LLC (www.capitalfinancialusa.com), and president of the International Association of Registered Financial Consultants. Known as “Coach Pete,” he has authored six books on finance, including his most recent, “7 Baby Steps to a Ridiculously Reliable Retirement Income.” He also hosts the nationally syndicated “Financial Safari” radio program.
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