4 Lessons Learned about Retirement Saving: A CFP® Looks Back

Sherrill St. Germain, CFP®

By Sherrill St. Germain, CFP®
Sherrill St. Germain is a CFP® professional turned freelance writer. She writes financial content with style and substance for a wide variety of clients and readers. Her work and ideas have been featured in books, online, and in magazines including Kiplinger Personal Finance, The Wall Street Journal and Financial Planning Magazine. When she puts down the pen, she can be found travel hacking her way to her bucket list destinations or hanging out with family friends, and cats (hers and others).
Posted on 06/20/2019

All you really need to know about saving for retirement you learned in kindergarten – through fables, fairy tales, and bedtime stories. But when you're charting a path through dark, unfamiliar territory, it's not always easy to distinguish between Grandma and a wolf disguised to look like her. As a CFP® professional working one-on-one with clients for a decade, I had ample opportunity to witness fairy tales and cautionary tales. Here I share 4 takeaways – from personal and client experience – to help you find your happy ending.

1) Slow and steady wins the race. "The Tortoise and the Hare" has been cited so often in the personal finance realm as to be almost ludicrously clichéd. Nonetheless, a quick glance at mainstream media ("How to Make a Killing in the Market!") confirms the message bears repeating: Saving for retirement is the financial equivalent of running a marathon.

I'd heard the tale, and I'd experienced the effect firsthand on my high school track team. Yet as a newbie 401k participant, I was still taken aback to see how quickly a nest egg can grow. Credit the magic of compound interest. But as illustrated in this MarketWatch article, there's nothing magical about it. It's all math and it shows how a saver who acts the tortoise can amass a cool $1/2 million (!) by saving a modest but consistent 6% of earnings.

And don't wait to jump into the race. A saver who starts at age 40 instead of 25 will have to set aside nearly triple the percentage of income to achieve the same goal. Ultimately, it's hard to make up for lost time by sprinting at the end.

2) Build on a solid foundation. As "The Three Little Pigs" discovered, when a wolf huffs and puffs at the front door, you want to be in a house made of brick, not straw or sticks. It turns out that overextending yourself can be just as costly for savers. Yes, contributing to a 401k is a great idea, but only to the extent that you're building on a solid foundation. Otherwise, your whole financial house could come crashing down around you.

Here's how that tale of woe might play out. A little pig experiences the economic equivalent of a hungry wolf (e.g. a downturn that costs his job.) He withdraws 401k money, less taxes and penalties. He takes a financial hit by selling in a down market. The 401k doesn't stretch far, so he taps his VISA, incurring credit card fees and interest. Finally, he's forced to take a dead-end job to make ends meet, depleting the value of his most precious asset, his earning capacity.

To steer clear of that unhappy ending, take a page out of the third little pig's book: build from the ground up using sturdy components. Before you max out your 401k, make sure you have a handle on debt, an emergency fund, and adequate insurance.

3) Don't put all your eggs in one basket. Considering how ubiquitous this adage is, savers fail to heed it with surprising frequency and variety. Switching breakfast food metaphors from eggs to porridge, let's let Goldilocks school us.

Too cold – Many savers are tempted to stick with investments that never lose money. Unfortunately, these investments rarely keep up with inflation over time. To reap the returns retirement requires, you need to diversify beyond cash accounts, taking on enough risk to ensure you can still afford porridge later in life.

Too hot – But too much of a good thing can burn you. Some investors take on more risk than they can handle, often by accident. Here's how: your 401k offers many mutual fund choices, each comprised of a dizzying array of stocks and/or bonds. You pick 4 funds with alluring names suggesting growth. With 1000+ investments between them, you've diversified away enough risk, right?

Maybe not. If those 4 funds share a similar objective, they might contain pretty much the same investments. And you may have served yourself a dish that's too hot to handle.

Way too hot – Some retirement savers crank up the heat even higher by adding a too-healthy portion of employer stock. Taken in moderation, employee stock plans can be a great way to supplement your nest egg. But even if all signs point to "buy and hold," that stock could lose 60%+ in a single day. (Personal experience. Twice.) If it makes up more than 5 to 10% of your investments, that tumble could take a big bite out of your savings.

Just right – The moral of the story: it's all about cooking up a portfolio that's not too cold and not too hot. That's done by mixing the right ingredients in the right proportions for you. This is called asset allocation, and it is the key to fine-tuning your portfolio to meet your needs.

4) Don't wait for a fairy godmother. Once upon a time, there were gold watches, pensions, and health insurance for retiring employees. In the modern workplace, not so much. Add the shift to a gig economy, and a lot of us are without access to the standard 401k. Fortunately, there are other paths through this thicket, including traditional, Roth, and SEP-IRA's, Solo 401k's, health savings accounts (HSA), not to mention regular brokerage accounts. Don't just stand there; take one.

The End

The course of retirement readiness never did run smooth. When you come to a bump in the road, don't discount lessons learned early on from princesses and pigs, wolves and witches, foxes and fowl. Those simple but time-tested truisms ring just as true for retirement savers as for fairy tale protagonists. Heed their wisdom to ensure your journey to financial freedom reads like a Cinderella story.