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Let's overcome the first objection to retirement planning: I don't have enough time. Get over it. There will never be enough time to do all the things you want to do, to make all the money you want to make, to enjoy all the things life has to offer. The secret is to make use of the time you have, starting right this minute. Time is money. If you are like most people, you feel you don't have enough of either. And you're probably right. But if you were asked to choose between the two, your answer would be revealing. If you choose time, it means you've reached the point in life where realities change. You understand the simple truth: Time can buy you money, but no amount of money can buy you time.
That understanding colors the way you look at your future. Time has become a finite commodity. The issue now is to make the most of the time and to make sure you have the money to do that, even though you will never know how much time you have left. The challenge is not to count the minutes, but to make the minutes count.
CONSUMING TIME AND MONEY
It's not your imagination that time is flying by faster than ever. The days of your childhood, when summer stretched on endlessly, are long behind you. Now the days, months and years fly by quickly; you ask: Where did all the time go and where did all the money go? Some of the money that slipped through your fingers is all around you. Your home, car, furniture and clothing are a reflection of how you spent your working time. Every acquisition has a price, and the price was the time you spent making the money to buy it. Some of those acquisitions are long gone-clothing that went out of style and was given away, cars that depreciated in value and were sold. Other acquisitions have grown in value. Your education was costly, but it was valuable in creating the ability to earn more money. Your savings and investments, though battered by bear markets, continue to use the leverage of time to grow in value.
Overall, we live in a society based on consumption. Neither terrorist acts nor economic recessions have kept the U.S. consumer from shopping and adding to consumer debt. In a recent MetLife trends study, more than half of the respondents reported that they manage their finances by living paycheck to paycheck. If that's how you're getting by, you're not alone. It's not surprising that younger employees, ages 21 to 30, have little savings or investments. It is shocking to find that more than half of older employees, ages 61 to 69, are also waiting for the next paycheck to pay their bills.
If you think this lack of planning is a result of low incomes, think again. Fully one-third (34 percent) of higher-income workers earning $75,000 or more are also dependent on the next paycheck for survival. Thirty percent of those earning $100,000 or more say they're living month-to-month. All the people in the survey worked for corporations and were receiving some level of benefits. Half of them said they were worried about outliving their retirement savings.
RUNNING OUT OF TIME
But worrying and doing something about it seem to be mutually exclusive. It's as if Americans are addicted to debt, even though they understand that interest payments limit their ability to plan for a secure future. Bankruptcy has become an epidemic, but even debt liquidation does not always result in new attitudes toward saving. It's unthinkable that as the baby boomer generation ages, many of its members will live at a subsistence level. A growing economy will solve many of the problems of supporting an aging population. But an economy cannot grow if the government sucks up its resources through higher taxes.
There are many issues filled with uncertainties: How much money is enough? How much time will you have? Is it too late to start? The answers are easier than you think. Although you can't buy time, you can make better use of your time to add to your retirement savings. It's never too late to start the process.
WHAT'S YOUR TIME WORTH?
It's critically important to evaluate your personal relationship to time and money-a valuation that will be different for every individual. It's difficult to put a dollar value on a minute, a day or a year of your time. You can divide your annual after-tax salary by the number of hours you work. That will give you the dollar value of one hour of your time. But most of us would say we're worth far more than that mathematical calculation-because of course, we're underpaid! Still, give it a try. Figure out how many hours you work in an average week, and divide your weekly paycheck by that number. Remember to use the after-tax figure for your pay. It's a rough calculation, but you may find your work is worth $20 an hour, $50, $100 or more. Knowing how hard you work to earn your money gives you a new perspective about spending it. When you make any purchase, it's worth computing how much of your work time the item would cost. If you take home $50 per hour, then that $250 winter coat will cost you almost one workday. But if your take-home pay is only $25 an hour, the coat will cost you nearly two days of work. Perhaps you could find something less expensive. That new flat-screen, high-definition TV at $2,500 will cost you 50 hours of work. Is it worth it? This is not a lesson in budgeting; it's an exercise in valuation, and it will lead you to your own personal conclusions. There is no right or wrong.
The answer to the question "Is it worth it?" will depend not only on the per-hour cost of your time, but on how you will use the item you're buying. One of my favorite pastimes is computing a "wear quotient." Wearing that $250 winter coat for two years gives a wear quotient of $1 per day ($250 divided by about 250 cold-weather days over two years). But a $250 dress worn twice has a wear quotient of $125. Consider your own wardrobe. You may have a mutual fund full of style but no substance in your closet. Also think about sporting goods, car accessories or electronics that didn't give you enough use to justify their costs in terms of your time.
Consider the potential impact of time on the money you don't spend today. What could have been done with the money instead? It's not always easy to compute the future value of current expenditures. You may go into debt to earn an advanced degree in business that will increase your value to prospective employers. These days, many students graduate from college with student loan debt of more than $50,000. It will be up to them to prove the long-term value of their investment in education.
THE TIME VALUE OF MONEY
Another way to value time is to measure how it can make your money grow without any extra input from you. Investing $2,000 a year ($38.46 per week) in an IRA, growing in a stock index mutual fund at the stock market's historic average rate of slightly over 10 percent, could build a huge retirement fund. Starting today, a 20-year-old could make that annual $2,000 investment inside an IRA for 50 years and have an account worth $3.1 million at retirement! Fully funding an IRA at $4,000 a year could generate a $6 million nest egg in 50 years, if the stock market continues its average performance of the past 75 years. If it's too late for you, tell a young person!
Clearly, the power of compound interest-the impact of time on money-is a major force of nature. The problem is that when you're young, you have no idea that time is such a valuable commodity because you have so much of it. When you're young, money (not time) is the immediately scarce resource. You don't have the long-term perspective until you have hindsight.
Unfortunately, we learn the value of time only when we recognize it as a finite commodity. And it is not only finite, but indefinable. No one gives us a sneak peek at when it will run out. If we knew for sure, it would be easier to plan. Even so, it's never too late to vow to make the very best use of the time we have.
Excerpted from Terry's book The Savage Number: How Much Money Do You Need to Retire? Copyright © 2005 by Terry Savage. Published by John Wiley & Sons Inc. For more, go to www.TerrySavage.com.