Thursday, September 24, 2009

Save Now For Retirement


Saving Money Tip #191 - Save Now For Retirement. I’m going to speak in general terms here. People in the US live approximately 80 years on average. From age 0 to 20 your parents take care of you, paying for your needs. From age 20 to 60 you work, paying for your own needs and that of your children, if you have any. From age 60 to 80 you don’t work, so who pays for your needs? Well, the idea is that you will pay for your non-working years from your working years. And that is why if you are between ages 20 and 60 and you are working, you should be putting aside money for when you won’t be working. Now I know not everyone follows this predictable pattern. Some might go to school until age 25. Others might work until 65. Some might live to 75, while others will live to 95. Again, I am speaking in general terms about why it is necessary to save for retirement.

If you want to not be working in your elderly years (or not working as hard) then you need to put aside money for that time now. It would be great if we all started that saving for retirement at age 20 – not only does it give us many years to save up, but it also takes advantage of the magic of compounding. However, I understand that not all of us were aware that it was necessary to save for retirement fresh out of high school or college. And we may find ourselves to be age 45 without having saved a dime. If that’s the case, then we can hope start saving furiously now and/or plan to work a bit longer maybe until age 65 or 67. It is never to late to start. I have done many other posts on retirement. One of which has you calculate how much you will need to save each year to live comfortably in retirement. The truth is nobody can accurately predict how much you will need. If your house will be paid off by the time you retire, that is a big expense that you don’t have to account for. If you plan to sell your big house in the northeast of the country and move to the south where real estate is cheaper, then you may be pocketing a big amount of money. If you are 60 and in good health and love to work, then you won’t need as much as someone who wants whittle their days away on a tropical beach.

The point is, in general, the approximately 40 years we are working needs to pay for about 60 years of living. And that is why we should be saving. I have heard people say that retirement is a modern notion and that years ago we didn’t need to do all of this retirement planning. That is true. But years ago, much of the country lived on farms, and multi-generations lived together with the younger generation taking care of the older generation when they couldn’t plow the fields any more. If you don’t anticipate moving in with your children, then you need to take care of yourself and start saving now.

In Real Life (IRL) – I’ve been reading lots of financial forums lately, and I have seen some people write that they are not planning to save for retirement. Their feeling is that they are going to live for now because they don’t know if they will even be alive in retirement. Or, they think that retirement planning was dreamed up by the financial industry earn fees on all of our investments. Or that retirement is a modern notion that has no basis in history. And while any or all of those ideas might be partially true, it doesn’t change the fact that there is a good possibility that most of us will be alive well into our 70’s or 80s, that we will need money to live on whether the investment company we choose is making income off us or not, and that while retirement might be a modern notion, we are living in today’s world that is much different than that of the past.

I know when I started my first “real” job at almost age 22 I laughed when the human resources person told me about retirement benefits they offered. To me, retirement savings was something my father who was in his fifties should be doing, not me, a young person in my twenties. When my co-worker advised me a year later when I began to qualify for the company’s 401(k) benefits, that I should at least invest up to the match my company was giving me, I listened. After that I began to talk to more people and learned not only about the tax benefits of putting money away for retirement, but also the financial benefits I would receive for starting to put money away early and consistently, taking advantage of compounding interest and good habits that had me continue putting money away for twenty more years.

If you didn’t have someone in real life advise you about saving for retirement, take my advice, the sooner you start putting money away, the less work you will need to do when you are older and possibly not in the position to be working. There are usually tax benefits to retirement savings, and the earlier you start, the more you will accumulate and the longer time you have to let the magic of compounding work for you. Use your working years to save for the years when you don’t want to be working.

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