How long do you plan to work?
In a very depressing recent article on CNN Money entitled “Delaying Retirement: 80 is the New 65”, it was reported that at least a quarter (1 in 4) of middle class Americans are failing to prepare for their retirements and will likely work until the age of 80. Keep in mind that the average life expectancy of a person is only 78.
Here are some more sad facts that were quoted:
• The respondents (ages 20 to 80) had a median savings of $25,000. However, their median retirement savings goal was $350,000.
• 30% of people in their 60’s had saved less than $25,000 for retirement.
• Three-fourths of middle-class Americans expect to work throughout retirement (Remember: If you work through retirement because you need the income, then you aren’t truly retired yet)
If these statistics are true, then this means our culture has serious problems in the near future. Mainly:
• How will people take care of themselves in old age (even just for health care costs)?
• What will be the implications for the younger generation? There will be fewer available jobs and more burden placed on the children of the elderly to take care of them.
Pensions to 401(k)’s – Protection to Ignorance:
Many professionals attribute these problems with savings due to, among many things, the transition from pensions to 401(k)’s over the past few decades. In many ways, a 401(k) has many advantages over a pension because of the control and choices that the individual has.
However, perhaps the fact that the individual has so much “control and choices” is precisely the reason why there is so little saving.
When you tell someone that they have to put away 10% of your paycheck in the company pension, they’d probably just accept it as if it were just another tax. But give that same person “the option” of putting it in their 401(k). Now there’s a million reasons why-not to: “I’ll do it later”, “I don’t make enough”, “I need the money now”, etc, etc. Unfortunately, there is too much living in the “now” and not enough thinking about how this may impact us later.
Also with a 401(k), the choices are too scary and confusing. Which one is the best? What if I choose a loser? How do I know what to do? With a pension, all the investing was happening behind the scenes and was for the most part invisible. So what happens when you place that burden on the individual? They become paralyzed by fear. They become overwhelmed and feel inadequate to make the proper choices.
The final comment in the CNN article comes from a woman who states “I don’t know that I will ever want to retire”, “I love what I do.”
And that may be true. But it’s not the point.
Retirement means being able to draw your income from something other than your job (like a nest egg). To truly be retired means having the choice to say I “do” or “do not” need to go to work anymore.
Unfortunately this final comment captures what I feel our culture is starting to lose touch with – the fact that some people don’t even realize they may never have that kind of choice.
If you don’t want to work until you’re dead and be like the 1 in 4 middle-class Americans described in the CNN article, then here is my advice:
1) Take Responsibility.
No one is going to look out for your money the way you will. The sooner you realize that, the better off your finances will be.
Realize you’re not one of the Kardashians. The way you see people living on TV and in the magazines isn’t real (read the book “Stop Acting Rich” if you want more proof). You have to live your life according to your own financial boundaries, and that means within the amount of money you make.
Remember that there is not a company in the world that exists for very long when they have more money going out than they bring in.
2) Get Financially Educated
Although some money matters can be complicated, there are a few basics to live by. And for those, there are plenty of articles and books out there to help guide you (such as this blog!). Here are just a few simple things to remember when it comes to saving for retirement:
• The sooner you start, the better.
• Don’t leave money on the table. If your company does any type of matching or contribution, take FULL advantage of it.
• Know your company’s rules on vesting (the length of time it takes before your company’s contributions are completely yours). Don’t hop jobs until you understand and consider how much money you may be forfeiting as a result.
• Pick funds in your portfolio with low cost ratios.
• Pick funds that cater to your level of risk comfort. If you don’t know what that is (or haven’t realized it yet), error on the side of conservative over aggressive.
• DO NOT borrow against your retirement plan.
• Don’t stop with just your 401(k) or 403(b). Realize there are a lot of other savings tools (like an IRA) out there as well.
3) Commit to Contributing
It doesn’t matter what your final goal is: If you don’t stay disciplined and committed to making contributions, you’ll never get there.
Pick a percentage and stick to it. The only time you should change it is when you plan to raise it. There are two huge benefits to this approach:
• You’re going to be able to contribute more to a 401(k) or 403(b) than you would your normal savings because the money is taken out of your paycheck before taxes. Also, if your company does any type of matching, you’ll get an even bigger bonus!
• You’ll learn to live without it. If you treat your retirement contribution like another tax expense and not like money that you have access to, then you’ll learn to live off of what remains of your paycheck. This is important for your spending habits and lifestyle.
Over time as the market goes up and down, you may think “what am I doing?” And there will be times you’ll want to put less in because you’ll want a new car or will have some other expenses. But don’t! As you continue, the money you invest now will compound into a larger sum than you could have ever saved on your own.
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