With college and high school graduations going on right now, it is extremely important for all of you young graduates to consider planning for your retirement. Yes, I know what you are thinking, I just finished school, and I have a ton of student debt to pay off. Well, you cannot also afford not to pay yourself for your retirement as well. If you need help with planning any of this, please consider contacting a fee-only financial planner to assist you with the numbers and logistics. But let us examine why you need to plan now and why it is not a good idea to delay this any longer.
If you are in my generation as a Gen X’er, it is still not too late to plan for your retirement but time is not on your side as it is with recent graduates. And yes, a few of us have jobs that have small pensions and we can rely somewhat on Social Security being there in some form similar to what our parents have today. But for Millennials pensions will most likely be non-existent and Social Security will have to have some serious and major overhauls if it is to survive for your retirement. That is not to say it will not be there because I think it will be available but in what shape I am as uncertain as many of you. But consider anything that you get out of the Social Security system as a bonus for what you will save on your own.
With the disappearance of the pensions, companies have shifted to the defined contribution plan or 401(k). This is a mechanism to save for your retirement with contributing a pre-tax dollar to a company-sponsored plan that normally invests in some form of mutual funds. Now, if you work for a company that has a 401(k) plan and it offers a company match always contribute up to the limit of the match, or you are leaving free money and an instant return on the table. And for those who have plans that offer mutual funds that are expensive and high with fees, it is still wise to contribute enough to get the match and then invest in an IRA outside of work for additional savings. Then once you have contributed your full $6,000 to the IRA, switch back to the 401(k) and save more there as it will lower your taxes. And while you are earning less in your early years, I advise that your IRA be a ROTH IRA where you pay the taxes now and enjoy tax-free income in retirement. That advice changes as you earn more, and you move into higher tax brackets in your later working years. But as always, this advice is general in nature as I do not know your unique situation and always seek the advice of a qualified fee-only financial planner.
So, by now, you are asking what the rush in saving for my retirement since that might be almost four decades away is? The answer is simple, and it has to do with the more time you have working for you, the less you have to save and ultimately worry about money when you do retire. We will examine four ages and two investing amounts in the following examples, and you will see exactly why it is important to save now even as you pay for your educational costs or student loan debt. Even a few extra years can make a huge difference in the amount of money you can save between now and age 59 ½. In the fifth age example, we will work until our full retirement age of 67 if things do not change with regards to that from a common graduation age of 21. Let us get started looking at the hard numbers then.
In the following four examples, we will be contributing $200 or $400 a month until age 59 ½ starting from age 21, 25, 30, and 35 with a conservative annual rate of return at 7%. To make my point on how time works in your favor, we will start with the highest age and go backward on the amount you will have by the time you retire. So if you start saving at age 35 with $200 a month, you will have just about $150,000 at age 59 ½, and if you were to save $400 a month, you would have about $300,000. No too bad but it could be better. So, now we started at age 30 with $200 a month and have accumulated about $225,000, and at $400 a month, we have about $453,000. Still not enough but it does look better. Now we move to age 25 at $200 a month for about $333,000 and wit $400 a month it grows to about $671,000. Looking a little better but what sort of difference will the extra four years starting at age 21 make? Well at $200 a month you will have about $455,000 and at $400 a month end at about $910,000. So, by just adding those extra four years and starting at age 21, you end up with almost $238,000 more in the account where you contributed $400 a month. Time works wonders and, in your favor, the younger you start.
But what if you start at age 21 and contribute until your full retirement age of 67? Well, let us examine the same $200 and $400 monthly contributions over 46 years. In the case of $200 a month you would have almost $820,000 and at $400 a month almost $1,600,000. This shows that the younger you start to save, and the longer you delay taking out of the fund, you can save some serious money for yourself. In the case of a 21-year-old saving $400 a month for 46 years, you will have almost $700,000 more than if you had stopped at age 59 ½.
Yes, we all have bills, debts, wants, needs, and desires we must pay for at all stages of our lives. But as you can see, it does not pay to not pay yourself first for your retirement years. If you have any questions or would like to discuss your situation, please feel free to contact me directly or leave a message here on the site. And as always, for a free PDF on financial planning join my email list on the form below.
