It’s Your Choice, but the Sooner You Begin Saving for Retirement the Better
A number of years ago, over lunch, one of my coworkers mentioned offhandedly that she probably should start a 401(k) plan. To say I was surprised would be an understatement. There my friend sat, a bright, 30-something woman, who successfully balanced a career with a family, and yet she wasn’t taking advantage of an opportunity to ensure she’d enjoy a secure lifestyle in retirement.
When I asked her why she hadn’t started contributing to a 401(k) plan, she shrugged her shoulders and said, “Oh, I’ll get around to it one of these days.”
Unfortunately, my friend is not alone in the belief that there’s plenty of time to save for retirement. Yes, when you’re in your 20s, 30s or even 40s, retirement seems far, far away. But the reality is if you want to ensure a secure retirement – one that will allow you to continue living the lifestyle you lead today – you have to start saving early and put time to work for you, not against you.
This week, Oct. 18-24 2015, is National Save for Retirement Week. It’s the perfect opportunity to take stock of your retirement preparedness and determine where you are, where you want to be and what steps you need to take to bridge that gap.
Before you start, there’s a new retirement reality that most of us will face:
It’s going to cost a lot more to fund our golden years, much more than we think, and much more than it cost our parents and their parents before them.
Many of today’s retirees understand all to well the challenges of creating a retirement plan that will last a lifetime. Short of having a crystal ball, no one can predict what impact future economic upheaval, skyrocketing costs, or policy changes may have on money set aside for retirement. But by beginning the savings process early, you have a fighting chance to not only weather what comes your way, but also make course corrections that will keep you on track to a secure future.
Here’s the advice middle-income retired Americans said they’d share with younger generations, if asked. And, Bankers Life and Casualty’s Center for a Secure Retirement asked them.
In a 2012 survey participants were asked to give younger people just one piece of advice. Two-fifths of respondents answered, “Save for the future,” making it the No. 1 answer, beating out “live life to the fullest,” “do what you love,” and “get a good education.”
But they didn’t stop there. Retirees also shared their top financial advice for younger generations. A whopping 93% said, “start saving early,” with “contribute to retirement at work,” coming in a close second at 84%.
So why do we need so much more money than previous generations?
For starters, we’re living longer. Thanks to medical advancements and other factors, the average life expectancy for Americans in 2012 was 78.8 years, an increase of 11 years over the past 50 years. Since we’re living longer, we expect our retirement funds to keep pace and outlast us. But what if it doesn’t?
That would be a fate worse than death said 77% of Americans aged 44 to 49 in a 2010 survey. Many believe that they aren’t prepared enough, didn’t start saving soon enough, and since the Great Recession, are at the mercy of less-than-favorable economic conditions. Feeling vulnerable and concerned for their future, they also think the country is facing a retirement crisis.
Our life expectancy may be on the rise, but so are our healthcare costs. Another reason we’ll need more money in retirement is that medical costs, including doctors visits, insurance deductibles, prescriptions, out-of-pocket expenses and more, are outpacing by two-to-three times the rate of inflation.
A generation ago, retirees could count on their retirement funds coming from three sources – Social Security, a pension and personal savings – or as it’s often known as the “three-legged stool.”
Today, that once-reliable stool is wobbly at best.
Many have predicted the demise of the first leg, Social Security, for years. While it may be battered, it’s still around and probably will always be in some form of another in the future.
Unfortunately, the bottom line is Social Security doesn’t pay what it once did, and that’s due in part to an overhaul of the system in 1983. For the first time in its history, Social Security benefits were subject to federal income tax. It wasn’t long before individual states enacted legislation to ensure they got a piece of the action, too.
More recently, the retirement age has increased, based on an incremental scale, from 65 to 67 years of age. If you were born between 1943-1954, the retirement age is 66. For those born after 1954, the retirement age increases gradually until it reaches 67 for those born after 1959.
The second leg, company pension plans, has all but disappeared. In the last 25 years, more and more American companies are doing away with pension plans altogether. Deemed too costly to maintain, companies looking for a replacement for this drain on the bottom line turned to 401(k) plans. Designed to supplement pensions plans, it was soon positioned as an alternative retirement savings vehicle that would be fueled by contributions from both the employee and employer. For the last decade, funding for 401(k) plans has been shifting more and more to employees, as employers began eliminating the matching funds aspect.
The Great Recession also pointed to the vulnerability of 401(k) plans for people whose allocations weren’t diverse enough to withstand the extreme downturns in the market. The Congressional Budget Office reported in October 2008 that “Americans had lost $2 trillion [from their 401(k) plans] in the past 15 months,” and the money wasn’t likely to be recovered.
That leaves personal savings, the one retirement source over which we have the most control, and it may be the “leg” in the most trouble. People are finding it more difficult every day to set aside funds for emergencies or their future.
In a USA Today online article, more than 72 million people told the national non-profit, NeighborWorks America, they didn’t have any money set aside for emergencies, with 47% of those surveyed indicating they had only enough savings to cover living expenses for three months or less.
For Millennials, adults under age 35, the news is even worse. This demographic group is having trouble finding a job or employment matching their education and experience levels. Many are carrying massive debt from student loans, as well. On top and because of this, Millennials have a saving rate of -2%, meaning they’re burning through their assets at an alarming rate.
But just because the “stool” is rickety, there’s no reason to throw it out. In fact, there are things you can do right now to ensure you have a solid retirement strategy that will provide you with the security and comfort you desire.
- If your company offers a 401(k) plan that provides the matching contributions feature, then by all means you should enroll in it. But if your employer is no longer contributing to your plan, you may want to explore other options. Your trusted financial representative can work with you to identify a strategy for you that will bring you closer to your financial goals.
- If you have a 401(k) plan with matching contributions, there are things you can and should do to protect your funds from life’s challenges. When determining your allocations, make sure you select a diverse portfolio that is appropriate for where you are in your career and what your goals for retirement are. The sooner you begin contributing the plan, the longer your money has to grow and recover from economic upheavals. Also, the higher your contribution now, the lower your taxable income will be.
- Before committing to any plan, talk with your financial representative, who can help you determine if the investment strategy you’ve selected will meet your goals. He or she can help you decide if a 401(k) plan is even right for you, and may suggest rolling your 401(k) into a different savings vehicle.
- Today, savings vehicles come in all shapes and sizes, and you and your rep will find the account(s) that’s right for you. Among our many options are individual retirement accounts, variable annuities (make sure you understand all fees and possible tax penalties associated with it), index funds, and other financial products, including cash value life insurance.
- Begin a savings program immediately and stick with it. Even if you can only afford to set aside a small amount at first, commit to saving. As things improve, you can always up the amount. The key is the earlier you begin saving, the greater the reward at retirement.
- Many companies offer direct deposit programs that deduct a set amount out of your check and put it in the savings vehicle you’ve requested. This way your money is safe, and you avoid the temptation to spend the money.
- One of the keys to smart saving is to put the one-two punch of time and compounding to work for you. Your financial representative can help you find the right savings vehicle that will help your money grow exponentially.
- To understand the power of compounding, look no further than the financial concept known as the Rule of 72. This is one of the easiest ways to see the time value of money.
- The Rule of 72 is designed to give a close approximation of how many years it will take for an initial investment to double. To determine this number, all you do is divide the number 72 by your annual rate of return. The chart below details how long it will take for an investment of $10,000 to double using various interest rates. This is the power of compounding.
It’s within your power to determine your retirement. By knowing that you’re going to need more money than previously thought and taking measures to ensure you have enough funds, you’ll spend your retirement living the life you want.