Save for Retirement

It’s Never Too Early to Save for Retirement

If you are in your twenties or early thirties, how much total money do you think you will need to save for retirement to maintain your lifestyle? Would you pick $200,000, $500,000, $2,000,000, or $10,000,000? If you chose $2,000,000, you’re on the right track.

“According to recent studies cited in USA Today, older millennials – those born in the early 1980s – will need about $1.8 million while younger millennials – those born in the late 1990s – will need upwards of $2.5 million.” – Robert Powell

How did the above numbers get to be so large? Well, there are a couple of factors driving this:

Longer Life Expectancy

The millennial generation is expected to outlive the generations that came before them. Historically, the retirement age, as calculated by the government, was 65; however, if you were born in 1938 or later, the age gradually increases. For those of us born after 1959, retirement is now 67. And, given the number of years till we reach that age, there is a good chance this number can move up higher during the course of our lives.

Inflation

You may have heard this word before and it may be one that confuses you. Think of inflation as something that measures how much you can buy with a given amount of money.  For example, let’s assume that an Iced Tea from Starbucks today costs $2.50. Next year, if inflation were to increase by 2%, then the same drink will now cost $2.55. See what inflation did there? It increased the cost of the Iced Tea by 5 cents and thereby increased your expenses. Currently, many economists believe that inflation will continue to increase which means that 1 Dollar today won’t be equal to 1 Dollar in the future since that future Dollar would be worth less.

Less Pension Plans

Pension plans used to be a popular source of retirement income. This plan contained money that your employer would set aside to give to you once you retire. So, depending on how long you worked for and what sort of salary you earned, your employer would calculate a specific amount that it would give to you during retirement. Today, while pension plans still exist, they are not as prevalent in the corporate world. A Towers Watson study found that from 1998 to 2013, the number of Fortune 500 companies offering such plans dropped 86 percent, from 251 to 34.

Less Social Security Benefits

It is not uncommon to hear many people today express the view that Social Security will be nonexistent by the time it’s their turn to retire. While that may be an extreme, it certainly will have to change in the future. The problem is that the government may lack funds to pay out in the future. If you look at your current pay stub, you’ll see a line item that says Social Security. This is money that is being taken from your paycheck and given to Social Security, which takes those funds and pays them out to people who have already retired. The money you pay today is not held onto for you but rather used immediately to pay those who are getting social security benefits now. Any unused money goes to the Social Security trust funds and not to a personal account that has your name on it. If there is a decline in the number of workers or if there is a change in the demographics (more folks retiring than working) then it is easy to see how social security benefits for the younger generations may be less in the future.

How to Start Saving for Retirement

We recommend following four steps to get on track for retirement.

First, get educated. Before taking any decisions, you must make sure to be informed.

Second, start saving. When you decide to begin planning for retirement you must adapt your spending habits to begin saving. If you find yourself unable to accrue savings then adjust your budget accordingly.

Third, once you are educated and have adopted a savings strategy, you are ready to finally take advantage of that 401k. A 401k will allow you to contribute money from your salary to a retirement fund with your employer typically matching your contribution. In addition, it reduces your taxable income since the money you put into your 401k is not taxed until you take it out.

Finally, make money you accumulate in your 401k grow. Many millennials are reluctant to invest their money in the stock market. This is a mistake. By investing their money in the ‘grown-up equivalent of a piggy bank,’ they are letting go of large potential earnings. A well-diversified portfolio will deliver countless benefits for your retirement fund, as it will ultimately reduce the years until your retirement.

 

The good news is that millennials are engaged and aware of the challenges that their generation faces. From mounting student debt, an increasing cost of living, and an unpredictable job market…the millennial generation has had at least one encounter with financial difficulty. The best thing you can do for your future self is continue to learn about your various retirement options and start building some savings today. Remember, no amount is too little to help in times of need.

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