Photo (cc) by Tax Credits
This post by Stephanie Taylor Christensen comes from partner site Mint.
For all the expert advice that is out there surrounding retirement planning and investing, there is one key advantage that every earner has in preparing for retirement, and it doesn’t cost a thing or require much financial know-how at all: time.
The longer you have to work toward retirement, regardless of where you invest and how the economy performs, the better prepared you are to retire one day.
According to Certified Public Accountant Ryan Himmel, many individuals won’t have more than $100,000 saved up for when they retire, and it’s because they don’t even start thinking about retirement as a prioritized goal until their 50s.
The reasons for putting it on the back burner are understandable: Your younger years are often marked by lower salaries, and possibly, digging your way out of student loan and credit card debt.
Then, you begin to focus your savings on buying a home, cars, and having a family. Before you know it, retirement isn’t so far off into the horizon – but you’ve cost yourself dearly by simply missing the advantage that time brings to long-term investment growth.
Consider the difference between a person who saved $100 a month starting at age 25, versus 35: Assuming an 8 percent return on investment, the younger saver would amass $365,000 for retirement by age 65.
The one who started 10 years later would have less than half of that saved by the same age, simply due to the lost opportunity of long-term growth.
You cannot predict the macro economy
Economists, stock brokers, and investors all make a living by studying and spotting economic trends before they happen, but the reality is, no one can predict what the future economy holds, because it is dictated by so many unpredictable forces, including global politics, the weather, and human behavior.
Regardless of what you think life will be like when you’re ready to retire, you have no way of knowing. Without retirement savings, you’re completely at the mercy of the unknown.
If you haven’t saved enough for retirement and it’s nearing, you’ll have no choice but to make up for lost time by putting your money into higher-return – and higher-risk – investments.
If the real estate market is in a down cycle, you could be left with a home whose equity you cannot leverage by way of a sale, refinance, or reverse mortgage.
If lifestyles, technology, and other innovations put your skill set less in demand, you may not be as marketable as you imagine.
While any of these factors could happen regardless of how much you’ve saved, having retirement funds gives you more control over the uncontrollable.
Not getting your worth
If you’re shunning retirement savings because you intend to work until you drop, rethink your plan. In a recent survey conducted by Capital One ShareBuilder, 1 in 4 Americans plan to work part-time during their retirement; one-third plan to maintain their current lifestyle.
The issue with that plan is the availability of high-compensation job options that will be available to the aging population. Take for example the “lump of labor theory,” a widely accepted belief by European economists that postulates the existence of older workers in an economy takes jobs from younger workers.
Regardless of whether you believe the theory, the heart of the message is worth considering: If employers must choose, will they opt for an older worker who has loads of experience – but higher income expectations – or a younger worker who is willing to do the job for less money?
Living longer than you think
According to the Society of Actuaries 2000 Annuity Table, there is a 17 percent chance a male age 65 will live to age 95. Females who are 65 have a 23 percent chance of living to age 95.
For married couples, there’s a 36 percent chance that either member of the joint couple will live to age 95. If you’re putting off retirement savings because a life of golfing and relaxing isn’t on your bucket list, consider that regardless of your desire, health issues brought on by the aging process may have an unintended consequence.
In the brief “The Decline of Career Employment,” published by The Center for Retirement Research at Boston College, experts estimate that 15 to 20 percent of older workers are not healthy enough to remain in the workforce during their older years.
Not having a fallback plan
Though the future of Social Security remains a political hot button, economists agree that the funds won’t be around at their current levels and criteria for much longer.
In the most recent Social Security Trustees’ annual report, the year 2033 is marked as the time Social Security and disability funds are expected to decline significantly.
Though Social Security Commissioner Michael Astrue did state at a press conference that Social Security likely wouldn’t be depleted entirely in 2033, he did acknowledge change if Congress does nothing, stating “there will be sufficient assets to pay 75 percent of the benefits.’’
Given that current Social Security income levels aren’t even enough to support many retirees, plan on Social Security as a supplemental, rather than primary, source of income – at best.