No one is suggesting it’s easy for someone in their 20s to imagine retirement but the day does come. Saving early for retirement is important because for every year you delay it, time becomes an increasing enemy.
With life expectancy increasing all the time it is reasonable to suggest that healthy people can expect 20 years in retirement. For those 20 years there’s no monthly pay check. You have to create your income from the actions you take while you were working and that means saving and investing for retirement. If you begin in your 20s and save regularly you’ll have 40 years to make suitable provisions. Saving early for retirement is important because for every year you delay it, time becomes an increasing enemy.
The sooner you begin saving in a tax deferred account the better. The point is that best estimates suggest that you’ll need 80% of your earned income at retirement to fund your lifestyle in the following years. That may be two decades or even more. That 80% may be on the high side if you don’t intend to travel extensively or want to pursue expensive past times. You can do your own calculations on what you might need and then determine what you’ll have to have in your retirement fund to provide it. Social Security will provide a certain amount but the System is in trouble. Estimates suggest that without a significant injection of funds benefits will fall by up to 25% by 2030.
Make Your Calculations
If you’re going to live for 20 years after you retire you’ll not be able to take 10% of your fund out each year. It’s more like half of that, even less, so if you think you know how much you will need to live on you can soon calculate how big a fund you will need. Social Security will rarely provide more than $40,000 and the average is nearer $19,000. If you think you will need $50,000 a year and you estimate you will get $15,000 from Social Security then you have to take $35,000 from your fund each year. If that represents 5% of your fund you will need to start with $700,000.
There are several variables to consider throughout a career. Growing income is positive but redundancy remains a possibility. It is fair to make an assumption that you should never be out of work too long. The problem is, the later you start to save the more you’ll need to save for retirement each month. It’s worth looking at the monthly amount of cash you’ll need to set aside based upon the age you start saving for retirement in order to achieve a fund of a specific size. You will have to make an assumption of growth — for the purpose of this exercise the following figures are required to achieve that $700,000 target with 7% growth:
| Age | Monthly Savings |
| 25 | $280 |
| 30 | $390 |
| 35 | $570 |
| 40 | $850 |
| 45 | $1300 |
| 50 | $2100 |
| 55 | $3700 |
.
These figures are fairly frightening if you’re middle aged and over — especially considering the optimistic 7% growth rate.
Plan Alternatives
The most common plan these days is the 401(k) with guaranteed benefit plans increasingly obsolete. These plans are individually administered so you must know what you’re doing or ensure that the advice and support you receive is good. The beauty of the 401(k) is that employers will contribute towards a plan, dollar for dollar, up to a certain level. If you do not have a 401(k) at work the answer is the Individual Retirement Account (IRA).
There are competing demands for your money at every age. In your 20s and perhaps your 30s there may be student loans, the need to set up home for the first time, perhaps, and often other debts and credit loans. Credit card debt is expensive and if you are going to be able to save properly towards retirement you have to eliminate such waste. A simple installment loan is far cheaper with equal monthly installments over a fixed term.
If you act and look at other possible savings such as on things like insurance and utilities you should start to have a far healthier budget. The question is whether you can achieve the monthly figures outlined or whether you will have to settle for a much lower fund, and therefore much less to live on in retirement.
So … does it seem like you have some serious decisions to make?
Photo Credit: bernadette macpherson morris
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