The media has plenty of gloomy talk about the poor state of people’s retirement savings and readiness for retirement:
- Social Security is going bankrupt.
- Employers are no longer offering pensions.
- Millennials aren’t saving for retirement.
- State pension funds are underfunded.
What is clear is that most people need to be responsible for their own retirement savings. That saving needs to begin with your very first full-time paycheck after school. Yes, you have student loan debt, need a car, and a million other pressing needs – but that’s going to pretty much always be true, especially when you begin a family. But the longer you delay, the harder meeting your saving goal will be.
Retirement Savings Early
Take this example. If you start saving $150 a month at age 22 with 7.5% return, you’ll have $620,000 by the time you are ready for Social Security at age 66. But if you wait 14 years until your mid-thirties and then doubled your savings to $300, you will only have $404,000. So even more important than how MUCH you save is how EARLY you save. The longer you save, the more your money can compound. Give time for compound interest to work its magic and your money to work for you. This is why it is so important to save at least something from your very first full-time pay check – even with all the other competing needs for your money. The web has plenty of savings calculators to play with numbers like these which is fun and enlightening.
Retirement Savings – Where
The second part of the retirement savings puzzle is knowing where and how to save. Plenty of data shows that more people save when employers offer retirement saving benefits such as 401k plans with automatic enrollment. You are cheating yourself if you don’t take advantage of these, but what to do if your employer doesn’t offer this benefit, which is often true for workers in low end jobs or small businesses. You still need to save and have two easy options: IRAs (Individual Retirement Accounts) or the Federal government’s new “MyRA” program. You can get plenty of help and information about setting up an IRA at your bank or credit union. Another easy choice is one of the big investment companies such as Vangard, Fidelity, or TR Price. Visiting one of these companies makes it super easy, but you can also visit their websites.
Retirement Savings – How
Don’t worry too much about which kinds of funds to invest in. See my article on “investing made easy”. The key points to know are these:
- Young investors should be invested mostly in stocks since only they can provide the return you need to build retirement savings.
- You should not worry about the inevitable gyrations of the stock market.
- When the market is down, you can buy more stocks “on sale”.
- You have decades to invest, enjoy the magic of compound returns, and see the market go up and down, down and up – multiple times.
The final part is to put your retirement savings on “auto-pilot”: have your savings automatically moved from your checking account to your retirement account. Your savings goals should have equal priority as your other needs. And do NOT be tempted to raid your retirement savings account!
So take action now. Don’t get a surprise visit from your future self in a time machine slapping you around for gross financial mismanagement!
- Setup a retirement account: 401k, IRA, or MyRA.
- Invest in stock or target date funds.
- Put your savings on auto-pilot with automatic deposits.
- Occasionally watch your investments grow, but don’t look when the markets are down (unless it’s to marvel at how many more shares you are buying with each investment).
When you are ready to know more about investing, see my articles on investing.