Want a Wealthy Retirement? Follow the Math

Short-term thinking gets a lot of people in trouble. Politicians, business leaders and movie stars all have courted disaster simply by putting too much emphasis on today at the expense of tomorrow.

But you don't have to be a celebrity to fall victim to short-term thinking. Millions of Americans are guilty of the same mistake when handling their money, says Edgar Norton, professor of finance at the College of Business at Illinois State University in Normal, Ill.

Norton says delaying gratification by saving more money today can allow you to spend more in retirement. In the following interview, he employs some basic math to show how a dollar spent today can leave you much poorer in your golden years.

Americans are notoriously bad at retirement planning. In your opinion, what are the biggest obstacles to getting people to save more for their golden years?

Consumers, in this regard, are like politicians -- focusing on the near-term and what to spend "now" to try to make the short-term better. People need to learn to wait. Delayed gratification can result in greater amounts of future spending via current savings. Certainly, more education and financial literacy can help, as can automatic savings, (such as) automatic payroll withdrawals to 401(k)-type vehicles.

On the other hand, some don't save because they can't. Choices made earlier in life -- or maybe due to unfortunate circumstances -- limit their ability to get the education, training and experience they need to get better-paying positions.

But that said, there will always be persons on the lower end of the pay scale, and that is where Social Security plays a large role. But even if such people can save $10 to $25 a week or month, that will help over time (to) provide breathing room for future retirement.

If invested monthly over 40 years, and if it can earn 5%, $25 a month can grow to over $38,000. If invested to try to earn 7% annually, $25 per month can grow to nearly $66,000.

Now, if a low-income person can start saving $25 per month and increase that over time as they get raises and/or better jobs, the amount of their savings after a 40-year work career can be even higher.

Another issue is a focus on "retirement." That seems to be a relatively new concept! Go back to Grandpa and Grandma on the farm -- they worked as long as they could, and when they couldn't, they still helped in the kitchen and provided wisdom to the "young'uns" who were taking over the farm.

Multi-generations lived together, or close by, so "retirement" wasn't that big of an issue and family care (for babies or older generations) was done in-house -- both on the farm and in the city. Family taking care of family helps to reduce the need for the "I need $X million so I can retire someday" syndrome.

So this question is quite complex, as it deals with human nature (spend now), government programs (Social Security is now paying out more than it brings in), and changes in family structure and the mobility of American society and careers as (fewer) people work where they grew up than in past decades.

Are there other things that we should be doing as a society to help people save more for retirement?

Not to get too political, but the more we pay in taxes to finance government spending, that is more money out of our personal budgets and more money going to ever-increasing government spending and interest costs on debt. Smaller government, prudently managed, will allow people to keep more of what they earn.

K-12 math classes that have modules on making budgets and making spending/savings decisions can help increase financial literacy. Every dollar saved at age 25 multiples by a factor of 7 by age 65 if invested to earn 5% (annually), and multiples by a factor of nearly 15 if invested so it earns 7% annually.

So, that $1,000 purchase is reducing your retirement nest egg by over $7,000 -- or maybe $15,000 or more.

Over the past few decades, health care costs have skyrocketed. What do individuals need to do to make sure they can afford the medical care they need during their retirement years?

The average 65-year-old couple will spend about $250,000 over their joint life expectancies on insurance premiums, deductibles, co-pays and other out-of-pocket expenses. Most do not realize the amount of health care spending in retirement. After all, for many, their employer paid for much of their health insurance premiums.

Unless they go to a financial planner, a person may not realize this extra amount needed to fund retirement living expenses and health care. And, of course, health care expenses, like all prices, will rise during one's retirement.

A person who is able to finance $100,000 a year (in) retirement spending in 2014 will find the purchasing power of that money nearly cut in half 20 years later -- and possibly lower, given the inflation rate for out-of-pocket health expenses.

So the simple answer to this question is: Learn about the true cost of your health care insurance premiums and spending, and save! Health savings accounts (or HSAs) are one attractive option. They are like IRAs for health expenses. Unfortunately, current law prohibits a person from participating in Medicare and continuing to make contributions to an HSA.