How much thought and planning have you put towards retirement? How much are you saving for it? Saving for retirement may not seem like a priority when you have more urgent needs—especially if it seems like every dollar of your paycheck is spent before you even receive it.
Every stage of life has its financial priorities. When you are starting out on your own money is needed for things like your first apartment, furniture, a car, and of course you may have student loans. Later, you may want to purchase a house. That means a down payment and a mortgage. If you have a family, there’s saving for their education as well. And there are always bills, the cost of food, medical care, and many other constant costs.
When facing your current financial expenses saving for retirement years or even decades away may not seem like a priority. But if you don’t have the money now while you’re working, what are you going to do when you are older and are no longer able to work? After all, when you’re in retirement, you’ll still have financial obligations.
You need to start planning and saving for retirement now! And here are three reasons why:
1. Pension Plans Are on the Decline
Conventionally, there are three primary sources for retirement income: pension plans, social security, and personal savings. They are often referred to as the three-legged stool. A pension plan, also called a defined benefit plan, is when your employer provides you with a guaranteed fixed income for the remainder of your life when you retire (and maybe your spouse too if elected). The amount of your benefit is based on your years of service at your employer and your salary history. A pension in combination with Social Security provides a steady stream of income for your retirement. Your personal savings provides the remainder of your retirement income need.
A pension plan is great if you have one. But most of us don’t. Pension plans are on the decline. The trend has been employers shifting away from offering traditional pension plans. Instead they are offering defined contribution plans, such as a 401(k). A 401(k) is a salary deferral plan where you elect to have a certain percentage of your salary deducted from your paycheck to a separate account established for your retirement. Although some employers may make a contribution to your 401(k), it is a personal savings plan where you take the initiative to save and invest. It does not provide the guaranteed income of a pension.
Without a pension plan, that leaves Social Security and your personal savings. Only two legs of the three-legged stool. And it is important to note, Social Security was never intended to replace your income. It only supplements a portion of your salary. So if you don’t have a pension plan you need to rely more on your personal savings. A great way to save is through tax-deferred accounts established for retirement such as an individual retirement account (IRA) or a 401(k).
2. Longer Life Expectancy
Due to medical advancements, you’re more and more likely to live for a long time after you retire. According to The Social Security Administration, “a man reaching age 65 today can expect to live, on average, until age 84.0. A woman reaching age 65 today can expect to live, on average, until age 86.5. And those are just averages. About one out of every three 65 year-olds today will live past age 90, and about one out seven will live past age 95.”
This means you need to make sure you have enough financial resources to last for 10, 20, or 30 years after you retire. Maybe even longer! For some, the number of years you have in retirement may be just as long as the number of years you spent working.
3. The Time Value of Money
The sooner you start investing, the better. Simply because your money has more time to grow and collect interest. Time is one of the most significant variables that affects the future value of your investments. It’s also something you can’t control. You can change the amount of money you save and invest. You can make changes to your investments. But you can’t go back in time to change the date you started to invest. You can only take action now.
The best way to see the impact that time has on the future value of your investment is to compare a couple of scenarios using a financial calculator. Let’s say you invest $400 dollars every month for 20 years. Let’s also use the assumption that your average annual return will be 7% and will compound monthly. After 20 years, your estimated value will be $209,986. Now in the next scenario, let’s keep all the variables the same except for the time period. Let’s change it from 20 years to 40. So if you invest the same $400 a month with an estimated annual return of 7% a year that compounds monthly, in 40 years your estimated value will be $1,056,449!
As you can see, you’ll be in a much better financial position in your retirement years if you start investing in early versus waiting until later. The difference is significant!
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