We often rely on metaphors to describe our financial lives: it is a journey on a financial highway, how fast or slow you go determines when you will arrive at your retirement destination. This is not how it is.
Consider the chicken joke, which many of us don't understand. The chicken crossing the road is a metaphor for the life of the chicken. It begins safely, takes on the risky business of simply staying alive and when that journey is done, when they have "crossed the road", it's over.
Using metaphors for retirement such as "journey" or "financial highway" conjure up images of something languid and purposeful, even if the destination is less clear. It assumes that we are in the flow of traffic, safely ensconced in our vehicle of choice, the scenery of life passing by as we move forward. But a more accurate picture would be the one the chicken sees: a trip across traffic to the other side, which we assume, also metaphorically as being better, greener and much more pleasant and rewarding.
The idea that we're crossing the road rather than journeying along the financial highway is not something we want to embrace. It instead acknowledges the risks we need to undertake in the effort. The control you exert is not all-encompassing. Although many will weigh in on the subject suggesting that you can moderate how much risk is needed, too conservative and you never leave the side of the road you are on; too much risk and your chances of getting across uninjured are diminished. This is not how it is.
Finding the right amount of risk is not as many would suggest, a question of tolerance. Your tolerance shifts as you age and the attempt to pinpoint what you are at any moment in time is a backward-looking affair. It has no real grounding about where you are right now compared with where you might be in the future.
What we can learn is simple: you need risk that begins when your investment decisions are initially made. For most, this is the target date fund. If it is, then you need to understand how they work. A typical target date fund looks to a typical future retirement based on historical norms (retiring at age 65). But you may have chosen a career that could potentially enable you to work well beyond that arbitrary date. If so, extend the "typical" target date by a decade or so.
If you plan offer index funds, build a basket across five to six index offerings (large-cap, mid-cap, small-cap, bond or fixed income, international and emerging markets).
The success of your efforts, the ability to sustain the risk-filled trip, depends on your contributions. Think of these as the calories burned by an athlete. Not enough and you will not complete the task at had. Too little in the way of contributions and you will be starving yourself financially. In crossing the road, this financial nourishment keeps you quick witted and agile.
The typical participant in a retirement plan like a 401(k) or an IRA contributes based on what it costs them to live; not on what it will cost them to live in the future. Does this mean budget requirements play a role? Yes they do. Does it mean that financial austerity while working will enable you to retire comfortably? Yes, for two reasons: It gives you a clear picture of living within in your means, something retirement comes with, and it build a past that will impact the future.
The other side of the road will come quick enough. And when you get there, you will feel much better about the journey you took had you taken the risk to take the crossing in the first place.
