Are You Saving Enough for Retirement?
There are a number of reasons not to focus on saving for retirement. If you are young, saving for retirement may seem like something you don’t need to do now, because retirement is so far in the future. If you are close to retirement, you could avoid focusing on saving because you may not have built up sufficient savings and decide that it is too late to save enough to make a difference.
If you are struggling to save enough for retirement or are so freaked out by the topic that you aren’t even focusing on it, you are not alone. Over 100 million working age individuals have no retirement account assets, according to the National Institute for Retirement Savings. That means 3 out of every 5 workers have nothing set aside!
Reviewing if you are saving enough for retirement is a smart thing to do for your long-term security and for you overall financial health.
Here are five of the key areas you should pay attention to when determining if you are saving enough for retirement.
Age: The Biggest Factor
Saving for retirement isn’t only about how much you can stick into the bank tomorrow or out of your next paycheck. It’s about how the money you save can grow with compounded interest, over time. The sooner you start saving, the longer your retirement savings will have to grow.
Here are two ways of looking at this.
One example is that you will end up with about $80,000 in your retirement account in both these scenarios, with a 2.50% interest rate present in both:
- You put $100 to start your account at age 20, and $100 a month for 40 years.
- You put in $100 to start your account at age 30, and put in $150 a month for 30 years.
Another way of looking at it is to compare the results if you:
- Make an initial deposit of $1,000 to start a retirement account and then add $100 every month for 40 years, or
- Start with the same $1,000 deposit and also maker the same $100 monthly deposit, but only for 20 years.
Assuming a 5% interest rate, compounded monthly, after 40 years you would have $159,960. After 20 years you end up with $43,816, a little more than ¼ the money you would have by saving for 40 years. Half the time and one quarter the savings!
Use the Bills.com compound interest calculator to see how different monthly amounts can grow for you, so you can set the proper goals for reaching a sercure retirement.
Have you given any thought to how your health factors into your retirements savings? Medical expenses can add up quickly. As you age, it is reasonable to expect that you will need to spend more on medical care and prescriptions than when you are young.
When you are putting together a plan to much to save for retirement, take an honest, in-depth calculation of your health. Are you in good shape now? Do you have any chronic illnesses? Are there serious illnesses or diseases in your family’s medical history? If your health risks run high, then you have a good reason to save more for retirement and to invest in long-term care when you are young and it is less expensive. There are few things more heart-breaking than hearing from someone who has to choose between paying for necessary medical care and covering basic expenses. Take the right steps now so it is likelier you will be able to live comfortably and take care of your health.
When Do You Want to Retire?
If you plan to work for a long time it is reasonable to set aside a little less in your retirement account than if you want to retire early. The earlier you want to retire, the more incentive for building up retirement savings aggressively during your peak earning period.
Putting less in retirement doesn’t mean that you should use that money to spend on anything you want. A prudent choice can be to use some for investments or to save up for a big purchase, such as a down-payment on a home, or to spend some on long-term care insurance or some other type of insurance that protects you from an unexpected crisis. It could also give you more to budget on discretionary spending, but be careful that you cover your financial needs before spending on your wants.
Current Income, Expenses and Debts
Your current financial net-worth and your monthly cash-flow matter a lot. Have you made a budget? Have you figured out what you earn and what you need to spend for your monthly expenses? The amount you earn and what it costs you to cover your bills each month directly factor into how much you can and should be saving for retirement and for other needs.
If you are carrying debt right now, what does it cost you each month to pay your required payments and how long will it take you to pay off your debts? Set a plan to pay off your debts and be disciplined about it. Once you pay them off, take the money that you were using to pay down your debt and put it toward retirement savings.
If your employer offers you a 401(k) match, do your best to grab the matching dollars. It can make sense to forego them if you are paying down high-interest debt, but, in general, you don’t want to let the employee match “free money” slip through your hands.
Don’t Count on Government Help
In the past, workers who retired could rely on help from the government in the form of Social Security income. Even people retiring today are confident they can rely on it for the next 15 years or so. After that, the system will not be able to pay out, unless reforms are made.
You and the rest of Americans can hope that politicians sort things out and prevent the Social Security system from defaulting, but the younger you are, the more reason you have for building solid retirement savings that will provide a secure retirement independent of Social Security. It isn’t foolish to save for retirement as if government help won’t be available.