Pre-retirees must pay themselves first
WHAT does it mean “to pay yourself first”? This is an investment term which is important in personal finance and retirement planning.
It means to direct a pre-determined amount of your salary to your savings or investment accounts on a monthly or regular basis prior to paying any bill. In other words, pay yourself like paying a bill, but make sure that your savings and investments get paid first. It is therefore necessary to automate your contributions for optimum results. When you “pay yourself first” you are funding a nest egg that can create streams of income to pay you in the future.
Remember emergencies or opportunities may happen, huge unexpected medical expenses are possible and in retirement your monthly pension income can prove inadequate. Research shows that retirees who live comfortably in retirement have a registered pension plan and streams of income. It all start by paying yourself first. Wealth creation is based on “paying yourself first”.
Just last week I had the opportunity to meet with a couple who have decided to pay themselves first. They are both in their 50s. At 53 years of age and with a plan to retire at 65, this client makes monthly contributions, via salary deduction, to a pension plan. She plans to live comfortably in retirement and therefore started a diversified long-term investment account with an initial lump sum. She has automated her savings, so that she can “pay” her investment account first before paying any bills.
Based on projections, this client is on the path of living comfortably in retirement. This is what is meant by paying yourself first. It’s all about investing in your future self. In the same scenario, her husband has also started his investment journey with a lump sum and an automated monthly contribution to his investment account. He, too, contributes to a pension plan monthly. As a family they both can live comfortable, stress free in retirement.
Pre-retirees and seniors who are still employed in 2022 need to ensure that they pay themselves first. For the pre-retiree, the investment time horizon for retirement is imminent. Therfore, now is the time to reassess priorities. Have you saved enough for retirement? If you haven’t you may need to work longer and delay retirement. Some people are considering retiring early. But weigh the pros and the cons before making a decision. For persons who only have a pension plan as income in retirement, retiring early may mean staying a longer time in retirement on a fixed income. Health concerns may prompt early retirement for some pre-retirees.
For the pre-retirees who enjoy reasonably good health, now is the time to make the sacrifice and contribute more to your future. Reduce debts and spend less on “wants” so a greater portion of your income can be invested. It is best to invest for emergencies and not have them than not to save or invest and emergencies occur but there are no resources. Inflation is set to increase in 2022 and is expected to pose a challenge for the global economy for the next few years due to the pandemic, supply chain disruptions as well as increasing energy and commodity prices. Investment diversification is key in this uncertain economic environment.
Pay yourself first principle equips the pre-retiree with the discipline that will be needed to survive in retirement when markets become unfavourable. A resistance to spend freely in the early years of retirement will allow retirees to weather economic storms. Stress avoidance is a benefit of paying yourself first.
Recently, I interviewed a lottery winner who was worried that his winnings were “running out”. He was down to his last two million dollars. This is the reverse of “paying yourself first”. What seems like a fortune can be done in no time if careful thought isn’t given to financial literacy and personal finance management. Whatever the windfall that one gets, whether an inheritance or property sale it is important to save and invest, then spend last.
Pre-retirees, your future self, will thank you for the discipline that was imposed in order to enjoy a stress-free life in retirement. Always remember that money cannot buy happiness but invested wisely, it gives peace of mind.
Grace G Mclean is Financial Advisor at BPM Financial Limited. Contact her gmclean@bpmfinancial. and visit the website: www. bpmfinancial.com. She is also a podcaster for Living Above Self. Email her at livingaboveself@ gmail.com