Earlier this month the budget situation nearly forced the government to shut down many of its operations. Had the government not reached a deal on a last minute budget extension, most government workers would have been left without a paycheck until the situation was resolved. Thankfully the crisis was temporarily averted and the government has more time to work on a more complete resolution. Though the national budget is much more complex than personal budgets, there are several takeaways we can learn from this situation and apply to our personal retirement planning.
Plan early. We all know retirement is coming, just like the government was aware of the budget deadlines. While it’s not hard to draw a comparison between the government’s narrowly averted shut down and retirement planning, there is one key difference: The government gets to ask for an extension, you don’t.
Don’t make the same mistake the government made. Get started on your retirement planning now. It doesn’t matter if all you can do is put away $25 a week, start now. Start with your employer sponsored retirement plan if you have one, and try to contribute at least enough to earn any employer matching contributions. Another good option is opening a Roth IRA, which offers more financial flexibility and additional tax benefits. By starting now, you will have more time to build your retirement fund, which will put less stress on your finances in the future. You will look back and thank yourself for starting early.
Something can always go wrong. Government jobs are normally considered the most secure jobs around, with guaranteed pay and benefits. But as many government employees recently learned, the meaning of guaranteed can change. Although the crisis was averted, many government employees realized that a perfect storm could cause some serious damage to their plans and the same thing can happen to you.
You need a contingency plan. Having an emergency fund is essential at every stage of life, including retirement. You never know when something might happen that changes the landscape of your retirement plan. In addition to your emergency fund, you need to make sure you have adequate life insurance, long-term care insurance, and other insurance policies specific to your needs.
Don’t use a band-aid. The ability to extend deadlines is both a blessing and a curse for the government. Instead of finalizing a permanent budget for 2011, the government passed multiple temporary spending bills to continue functioning. This is akin to using credit cards to fund a lifestyle beyond your means. It’s rarely a good idea to avoid making big decisions, especially when it costs you more money in the long run.
Fix problems early, and use a permanent solution if possible. Start with the basics: Create a working budget and use it. It’s vital to your financial health to understand exactly how much money you have coming in, how much you have going out, and how much money you have in savings and investments. Once you create your budget, create an emergency fund worth six months of your normal living expenses and work on getting completely out of debt. Then start investing for retirement. If you can master these steps, you will be better off than most Americans and well on your way to retirement.