Trust me, I know saving for retirement isn’t at the forefront of a 20-something’s mind. In a world swirling with student loan payments, rent bills, and lower incomes, it’s hard to scrimp enough money to get a haircut every 3 months, let alone save for something that is 40 years in our future. As if paying off our debt isn’t enough, we’re also getting bombarded with advice telling us that we also need to set savings aside for emergencies and a down payment on a house. Overwhelming, isn’t it?
Although it may be something that we feel that we can’t fit into our budget, retirement savings definitely need to be included. When I imagine my retirement, I see it as a time spent traveling (hello, Bora Bora) or learning new hobbies (like the piano); however, if you don’t have the right funds set aside, you’ll have to do one of two things: a) keep working longer or b) retire but have less to spend. I’m sorry, but I’m not trading my trip to the Maldives for one to Florida – and you shouldn’t either.
Hopefully most of you are already contributing to a retirement savings account, even if it is just a small part of your budget. However, if you still haven’t caught on to what the cool kids are doing, read on for my top 4 reasons that you need to start. And start now.
1) Compounding Interest
This is the Big Kahuna of reasons why to start saving as early as you can. Compounding interest, in a nutshell, is this: you put money into an account, you earn interest on that money, and then the next year you earn interest on not only the original amount you put in, but on the interest you had previously earned as well. And let me tell you, it adds up quickly. Just look at the following chart – you can see that the earlier you start, the greater your overall savings will be when you retire. The difference in out of pocket contributions between starting at 20 and starting at 50 is $72,000, but you could end up earning almost $1 million more by age 65. Sounds like a deal to me.
2) Early Retirement
I know, you LOVE your job and want to continue to work forever, right? Alright, stop laughing. You are probably like the many people who, by the time they are in their 50s and 60s, are just counting down the days until they hit that 65 year-old mark and can say “Adios!” to the working world. And here’s the thing – the earlier you start adding to retirement savings, the earlier you may be able to retire. The internet is flooded with calculators that help you determine how much you will need to retire and still maintain your lifestyle. If you invest intelligently and consistently fund your retirement savings, that line in the sand may start inching forward. And who doesn’t want that to happen?
3) Longer Lives
It’s a fact – we’re living longer than ever. You know what that means? We also have to be able to support ourselves into our 80s, 90s and potentially our 100s for the lucky few. If you don’t start saving early and utilizing that compounding interest, you may find yourself up a creek without a paddle. And no one wants to live out the last years of their life wondering if their money will last them. So build that safety net – in my opinion, it’s always better to have too much than too little; although in a perfect world, you’d go to your grave with only a $1 in your bank account. (I’m sorry for bringing your death up. Forget I mentioned it.)
4) Social (In)Security
Sorry, friends, but you can’t depend on this. Social Security may be there when we retire, or it may not. You just can’t put your faith in it, which is why you have to take the initiative to ensure that you fund your retirement in a way that lends itself to the lifestyle you want to lead at that point in your life. According to the Social Security Administration, the reserves to pay out Social Security benefits are expected to be exhausted by 2037. After that, they expect only to pay our 76% of scheduled benefits and may have to introduce tax hikes or new taxes to accomplish this. Not very assuring, is it?
Ok, now that I’ve (hopefully) convinced you that you need to start saving, you’re probably thinking, where do I go from here? Don’t worry, I’m not going to leave you hanging. My next couple of blog posts will explain the different types of retirement accounts that are available in the market so that you will be informed enough to make the best decision for you and your family. So stay tuned! I promise, it’s information you want to have.