Episode 53: Is Playing Defense the Best Offense for Your Retirement?


July 22nd, 2021

48 mins 31 secs

Season 3

Your Hosts

About this Episode

After what we experienced with the Covid pandemic, a lot of us are still recovering from the economic impact but some are already looking ahead and putting Financial Defenses in play to prepare for the next period of uncertainty.

Surveying 2300 adults in 2021, 58% of Americans say they are in "Financial Recovery Mode". When asked what was their best defense was against future economic uncertainty, the two main answers were having a Contingency Fund (some call it an Emergency fund but I feel that subconsciously that can cause you to actually create an emergency) or savings (30%), and having a financial plan (27%). Even so, only 14% of those in financial recovery mode are looking more than 5 years out, compared to 24% planning month to month.

Seems like us Americans are still thinking too short term and often are more centered around life events like saving for a wedding or other short-term expenses. Instead, a longer term view should also be considered. Please think about implementing, as soon as possible, at least these five financial defenses that can help you build wealth and prepare you for any other future economic uncertainty.

1) Prioritize your Savings - Having a Contingency Saving account is crucial for your financial future. The survey found personal savings increased 10% with an average of $73,100. Some experts recommend you should save between 6 to 12 months worth of expenses in your Contingency Savings account. Be careful not to have the temptation to say 'yes' to everything like going out to eat, concerts and vacations. Be reasonable. Be responsible.

2) Pay Down Debt - Paying down high interest cards is a must. The interest charged should be perceived like a ROI when it comes to the decision of savings versus paying off debt. You have two options in paying off debt. The "snowball method" - pay down debt with the lowest balances first. The 'avalanche method" - where you first pay down the highest APR first.

3) Get Your Credit Score up - Your financial life depends on having a good credit score. The better the score the easier it is to get loans and lines of credit and it definitely helps lower the interest rate on those loans. This can save you more money for you to use for saving. Ways to improve your credit score include paying your bills timely, lowering your credit card utilization ratio (keep below 30%, 10% is better) and monitoring your score for errors. FICO breakdown - Factors that impact your credit score: 35% Payment history. 30% Utilization. 15% Length of credit history. 10% New credit. 10% Credit mix.

4) Save for Retirement - Knowing it is sometimes hard to think about when you have more immediate financial goals but saving for your retirement should be more like a mindset and look at as a way of creating wealth accumulation. Think of it as where your money is there to create more money. Einstein once said, "Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn't, pays it". Someone investing at 25 needs to invest much less money to reach $1 million by retirement. Assuming a 7% annual return, compounded monthly, with a retirement age of 67, someone at 25 only needs to save $330 a month versus $475 a month if you are 30, versus $700 a month if you are 35 and $1,045 a month if you are 40 years old.

5) Get Insured - Do not overlook the need for insurance like long-term care, medical, auto and even umbrella insurance to protect your assets. Having these insurances can act as a safety net and help you avoid surprise expenses that can deplete your assets or put you in debt.

Given what we all went through recently with the pandemic, it is a good time to reflect on your priorities for the future. Let's consider focusing on all of these defenses we discussed so that we can have a great life during retirement.