Do you speak retirement? Most people don’t. Personally, I like to sit around a campfire and talk about compound interest and exchange rates, but I sometimes get distracted by the chocolatey-smores and marshmallows – Oh wait. Perhaps that’s just me?
Retirement is something you probably don’t want to think about or talk about. It’s kind of boring* and it’s usually full of complicated numbers, jargon and equations that don’t make too much sense.
(*Or is it boring? I now find it really interesting, but it took a while of struggling to understand the concepts before I got the hang of it.)
So you just graduated. You’re more excited about your paycheck (and the fact that you have one), and paying your rent – than you are about understanding that 4% your HR department keeps talking about. Quite frankly, it’s a lot easier to ignore retirement and leave it until later – but how much later?
In the beginning, all of the numbers and jargon are really confusing. But being confused isn’t a reason to wait until later.
If you don’t get it now, you probably won’t get it later, either.
At my first job, we weren’t eligible for retirement benefits until after our first 6 months of employment. During that time, I spent many, MANY hours setting up sessions with our Vanguard representative and talking to HR about our employee benefits. I read the entire employee manual, and, still confused, pestered our finance department and HR about economics lingo, profit sharing, and retirement benefits. I read a whole bunch of books. It is confusing. I learned a lot. I probably annoyed more people than I would have liked, but sometimes you have to pester people with questions to understand what it is that you’re trying to do.
The point? First, ask lots of questions, and if you don’t understand the answer, keep asking people questions until you are confident in what you’re doing.
Second, I learned a lot, and I kept good notes, so this post should help you learn a bit without necessarily having to do quite as much work as I did.
What is retirement?
Retirement is that wonderful time when you get to stop working and do nothing for the rest of your life. Well, that’s how some people look at it. Not everyone wants to retire – many people will continue to work part-time well past age 65 and into their 70’s and 80’s. The idea, however, is that saving for the future will afford you financial independence, give you something to live off of in your old age if you do choose to stop working, and help to finance all those pesky medical expenses that tend to appear as our bodies get older and weaker.
How to save, how much to save, where to invest, and how much you need are the essential questions of retirement planning. (Some great resources I like are listed more extensively below. I am not a financial expert so if you want to talk to a financial planner or retirement expert, try another blog.) This post is just a frank recount of what I’ve learned over the past year from reading and experimenting. If you’re new, confused, or struggling to understand some of the basic tenants of personal finance – particularly about retirement – this post tries to keep it simple and relatively easy to understand.
How much are YOU currently saving?
With a few exceptions, when I talk to my friends in their 20’s and 30’s – most of my friends admit to not having anything saved for retirement or not knowing anything about what, how, or why to save for retirement. I don’t care if you think you’re going to work until you drop, or if you’re in between jobs – having savings for the future is going to be crucial.
Having savings is having freedom.
Saving for the future means you have the option of doing what you want.
But for some reason, most people aren’t saving money. They don’t know how, they don’t know why – or they aren’t aware of the implications of not planning for the future.
I’m scared. You should be scared.
From what I can tell, there are several big problems our generation is facing:
- You make less than your parents did at your age. “The average salary of 25 to 34 year olds has fallen 19% compared to 30 years ago (adjusted for inflation).” (From Forbes Blogs, Sept 2010)
- Life is more expensive relative to previous generations. Cars, homes, ipods, technology, gadgets, and excessive consumerism stretch our-already limited budgets. And if you think life is expensive now, watch the costs get more expensive as you get older
- There are fewer 20-somethings working in today’s economy.
- Many people in their 20’s aren’t saving much, or anything, for retirement.
- Generation Y-ers are straddled with debt from student loans, cars, and homes.
- Benefits aren’t the same. Not all jobs come with great benefits packages. Read the fine-print: is your job covering your needs?
- Government social security and medicare aren’t sufficient to cover the costs of your retirement needs.
- We are going to live a lot longer in retirement than our parents or grandparents will. They are going to kick it around age 80 or so. You might live until you are 100. Or later.
For an internet-savvy generation, and for a set of self-made talent with lots of smarts, this surprises me.
You’re the ONLY one who can put you first. Put yourself first. Save smart. Saving for retirement is putting pennies in the bank for your future self. Plan for your financial independence. Enjoy your freedom.
What’s the point of retirement?
Why do you care about retirement? Why should you bother thinking about it today, right now, and get it figured out?
In short, here’s what I came up with: we are going to work for about 30-40 years of our lives, give or take a few years. Then, around age 65, you’re probably hoping to “retire.”
Answer this question: how are you going to live from age 65 to age 100+? Not only does your current income have to support your lifestyle now, it’s also somehow supposed to fund 35+ years of your life when you won’t be working anymore.
If you work half your life, and are retired for the other half, does that mean that 1/2 of your current income should be saved for retirement? (And if so, are you currently saving 50% of your income?)
Fortunately, the answer is no; you have time, compound interest, and probably a few employer programs working for you, especially if you start saving at a young age.
The general estimates suggest that you should save between 10% and 20% of your income each year for retirement. And if you are planning on taking any significant amount of time off – say, to have a baby, travel, or go back to school – you should factor that into your planning and bump up your savings accordingly.
Barrier # 1: Not knowing about retirement (or saving).
Hopefully I lit a fire under your ass with a bit of fear-talk above. I worry about my future. I want to achieve financial independence, pay down all of my student loans, and never HAVE to work for anyone because I need the money. I want to work doing work I love, because it makes me happy – not because I need the money. (I assume you have similar goals).
In simple terms, retirement means saving for the future.
The first barrier to successful decision-making is information. People just don’t know much about retirement. Retirement is confusing. There is a lot of information out there. Not understanding it is not a reason to not think about it. As with anything else, start learning.
So, stop being stupid. I was stupid at first – and I felt dumb not knowing any of this. So I’ll save you the trouble by compiling some great resources for you. Here are some useful tools (none of these are affiliate links) to start learning:
- I Will Teach You To Be Rich, by Ramit Sethi. A powerful, motivational thinker and speaker. If you read anything, check out “The Psychology of Money,” and learn why we don’t do the things we should. Then, learn how to automate your finances.
- Get Rich Slowly, by JD Roth. One of the best personal finance blogs out there – possibly my favorite.
- Man Versus Debt. Adam Baker’s mission to sell his crap, get out of debt, and do what he loves. Great motto, great inspiration.
- Suze Orman’s money tools.
- Smart Money
- Consumer Reports: Product Reviews and comparison shopping.
- Bloomberg Business Week: Special Report on Financing Your Retirement
- 20 financial milestones you should reach in your 20s.
Barrier # 2: Not having goals for the future.
Okay, so now you have a vague idea of what retirement is and why you might need to save money. Perhaps you’re now so psyched to save money that you’re ready to do it – NOW, TODAY.
Good! But how much should you save?
Well, that’s step two: Figuring out your personal financial goals.
Is retirement for everyone? Not everyone needs to save for retirement. Figure out what YOU want to achieve in your current, future, and elderly retirement ages, and then put that plan into action.
Some people suggest that retirement – and working a 9-to-5 job for 40+ years and then not working – is an outdated model. There are a couple of schools of thought on this regard.
- Some people don’t plan to stop working at age 65. This is called the “work until you die” mentality. You don’t neccessarily have to plan for retirement – just plan to keep working until you kick it. For some professions, this makes sense (many construction jobs have a high death rate in just a few short years after retiring, unfortunately, and so even though they have pension plans and built-in retirement benefits, the workers have a low rate of realizing their deferred earnings). For others, they want to live within their means their whole life – and they plan to work through retirement. If you don’t mind working until you’re 95 and in a walker, do nothing.
- Wealth Accumulation. Some people want to be millionaires before they hit the big 4-0. These are your frugal, penny-pinching, or otherwise regular friends who set themselves up for success with goals, automated finances, and direct deposits. Saving money and accumulating wealth is about spending less than you make (by saving more OR by finding ways to earn more), measuring what you do spend and learning about your spending habits, and figuring out a realistic plan that works for you – often through automated finance plans or thrifty money-making plans. Alternatively, many people promote minimalism as an alternative to excessive consumerism (and thereby can earn more money by spending less), or alternative lifestyle designs.
- Saving just enough. Other people want to strike a balance: they accumulate enough to live off of but not so much as to leave a legacy or will behind. This plan does not mean you don’t save money. You just aren’t interested in accumulating excess wealth. (See Chris Guillebeau’s description)
Here’s the point. Write down your financial goals. Here are some good examples of great goals.
- Pay down your [school, car, loan, house, credit card] debt. Basically, get out of debt.
- Save an emergency fund.
- Save 10% in a retirement fund each year.
- Have $100,000 in retirement savings by age 35.
- Build an investment portfolio.
So, Sarah, what does that mean for me right now?
A general rule of thumb that helps me figure out my retirement savings (and I am not a financial planner, so go to one if you’re confused because they are experts and they are great – and by all means, take my words with a grain of salt): You should *roughly* have the equivalent of one year’s salary saved in your retirement fund by the time you reach age 30. If you’re hoping to make $50,000 a year by the time you are 30, then aim to have $50,000 in your retirement account by the time you hit age 30.
For example: if you start working at age 22, with $5000 in the bank, you’ll need to save about $400 a month to reach $50,000 by the time you hit age 30. There’s a handy tool on wallet pop that I like to use to calculate my savings over time.
(Note: the inputs I used were $5000 to start, 5% interest, $400 per month, ignoring taxes and inflation for simplicity). Go plug in a few numbers and see what you get. It will get you on track.
And if you read this far …
You’re the ONLY one who can put you first.
Put yourself first. Save smart. Saving for retirement is putting pennies in the bank for your future self. Plan for your financial independence. Enjoy your freedom.
… Saving for retirement is sexy.
Sexy, I said it.
Sexy, because being smart is hot. And people who know what to do with money and how to plan for the future are smart. Because it’s YOUR life. And if you’re frittering your money away on things and people and excess, perhaps you’re not thinking clearly. It’s your life, your choices, and your future.
I strive for financial independence.
I will get there one day.
I want to pay down my student loans in the next 6 years (by age 33).
I want to be a millionaire by age 40.
I have an insance amount of gratitude for the financial gurus and blogging pioneers that talk honestly and openly about debt, saving, making mistakes, tracking your spending, and achieving financial independence. I only wish I had learned more and started younger.
So, hop to it.
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