Risky Business – What speed is your retirement strategy?
We have an epidemic happening in this country and I’m not talking about the latest health scare. I’m referring to the growing problem that many Americans are running into once they hit retirement age… they don’t have enough money to retire. What a frightening reality to face. How many of you have a solid retirement plan in place (and no excuses about being too young to worry about it)? It just so happens; the best time to start a retirement plan is when you are young!
So, if retirement savings are so grossly underfunded, how are most Americans supposed to retire when they hit 65? The short answer is, they can’t! Try googling retirement statistics sometime and you will find facts such as 1 in 3 Americans have no retirement savings at all. The average age that most Americans start saving for retirement is now 53, leaving themselves only 12 years to fund the rest of their life. Unfortunately, these statistics are not showing any sign of improving.
How did we get to this point? Good question! There are numerous reasons, but some that make it to the top of the list are: procrastination, inadequate planning/decision making and taking money out of savings, often times with penalties and additional expenses. You will often hear those blaming the banks for the most recent housing crisis which then led into the failing economy and the stock market crash. This event did obviously greatly affect retirement accounts, but corrections in the market and economic slow-downs are nothing new. You have to plan for the ups and the downs.
Why do we tend to put off saving for retirement? The answer is actually pretty simple; we think we have plenty of time. Other expenses come up that seem more important. “No worries, I have plenty of time to catch up.” It’s this attitude that tends to get most people in trouble. Eventually, time does run out and what if we never got around to saving? Many parents put college savings for their children ahead of retirement savings. While I can appreciate that they want to give their children the best possible education, retirement savings is far more important for one basic reason … you can’t get loans for retirement! Think about it. You get to the point in your life where you don’t want to work, or maybe you can’t work, but your retirement accounts are not able to support you for the rest of your life. What are you to do at that point? Most return back to the workforce if they are physically able while others may be depending on their children or try to skimp by on what they receive from social security. That is no way to live that time of your life. You spent your life working hard; you deserve those golden years to do what you would like. This is absolutely possible, but it does take discipline in your earlier years to achieve.
The early years of a working career are some of the most important years in saving for retirement. Why is that? An investment strategy called compounding interest! Have you ever played with a compounding interest calculator before? If not, I highly suggest looking one up on the Internet and putting some numbers in so you can get an idea of the growth. There is a great one at Investor.gov. In particular, play around with the time factor so that you can compare 20 years vs. 40 years. The difference is exponential which is why it is so important to start early. Now, I understand that the younger you are, the less you have to invest. However, put in even a nominal amount that you could contribute a month, something like $20 to $100 and see what that does over 40-45 years. You may be shocked.
Here is an example to give you a better idea:
Initial Investment: $0.00
Month contribution: $100
Assume 11% overall return (based on S&P 500)
Length of time for investment:
Value after 20 years: $77,043.40
Value after 40 years: $627,920.07
As your salary begins to rise over time, it would be best to up that investment. Imagine the example above if you doubled your contribution. Just like the old fairy tale of The Tortoise and the Hare, slow and steady wins the race. Now, having said all of that about starting early, it’s never too late to start saving.
Let’s say that life has gotten in the way and you have found yourself at 40 and you have not yet started to save. Twenty years of savings is much better than 5 or 10 years. Simply put, start as soon as you can. Most of us go through hard times at some point in our life. Maybe you were laid off or had some health issues that caused you to be out of work for a while. During these times you may find that you cannot contribute much if anything to your retirement. That’s fine. Again, that is why you start early. That gives you more flexibility in your savings. There will be those good times as well when you can offset the rough times.
There are many ways in which one can save for retirement, but this very basic concept of compounding interest is something that is often overlooked. It may be that we don’t start saving immediately upon starting into the workforce. Basic financial strategies are not required courses in our schools; so much of this is not known unless you have talked with a financial advisor. Unfortunately, this is one of those things that does not work as well unless started early and it’s pretty hard to do something that you have never heard of before.
I ask you, have you started saving for your retirement?
If so, do you speak with your financial advisor on a regular basis? If you haven’t started, now is the best time. Life moves pretty fast and time will get away from you. Don’t wait on something so important as security your financial future.
It’s never too early or too late to start!