Critical Mass is one of the most important and overlooked financial principals in retirement planning. In this article, we’re going to discuss:

1. What Critical Mass is
2. How to Establish YOUR Critical Mass
3. How to get to Critical Mass
4. How to Invest after you’ve hit Critical Mass

 

What is Critical Mass?

Critical Mass is when you’ve accumulated enough money to live comfortably for the rest of your life without saving anything else. This can happen years before you retire or the day your retire, but it’s important that it is established because the way you invest before you’ve obtained Critical Mass and after you’ve obtained Critical Mass should be completely different.

 

Establishing Critical Mass:

For some people, establishing your Critical Mass can be a daunting task. All factors need to be considered when establishing what your Critical Mass is, such as:

• Inflation
• Life Expectancy
• Health Care
• Long-Term Care
• Future Inheritance
• Increasing / Decrease Bills
• Decreased activity in the later years of retirement
• Future investment returns
• Future interest rates

 

If you don’t know how to determine all of these factors (or you simply don’t want to deal with the hassle), then you can go to a reputable retirement planning firm and have them establish exactly what your Critical Mass is. Most firms (like ours) have retirement planning software that can input all of your data, and figure out exactly what your Critical Mass is and what you need to do to get there.

 

 

Getting to Critical Mass:

Getting to Critical Mass all depends on where you are and where you’re going. One of my favorite quotes is: “A map is useless unless you know where you are on it.”

Once you’ve figured out what your Critical Mass is, and where you currently are, you can set up a plan that will get you there. The 4 biggest factors you have to take into consideration when saving are:

• Time
• Return on Investment
• Amount being saved
• Fees

Most people do a good job on the first three factors, but are unaware of the fees that they’re paying. For why it’s so important, visit my previous article on the importance of low fees in investments.

 

Investing after Critical Mass:

My partner Dave had a friend who was planning on retiring as soon as he hit $2 million in his investment accounts. Dave looked at his finances and let him know that he only needed about $1.2 million to retire and that he had already hit Critical Mass. His friend was dead set on that $2 million number, and since he was only $150,000 away, decided to just wait it out another 6 months or so. Well that was in early 2000 and his friend was heavily invested in online companies. Then the tech bubble burst and his $1.85 million turned into $200,000 in a matter of months. He’s still working full time 17 years later.

If Dave’s friend would have simply locked his Critical Mass ($1.2 million) into something secure, then he still would have had $650,000 to invest and grow to obtain his goal of $2 million.

The point is, once you’ve hit Critical Mass, the only thing that can hurt you is loss. So, it’s recommended to use very safe investments that will give you consistent returns, over investments that are highly volatile. If you’re going to remember one thing from this article, remember this: The investments that get you to Critical Mass are not necessarily the ones that will keep you there.