For many of us, retirement is many years, even decades away. This can lead to a lack of urgency about saving and cause many of us – actually, most of us – to underfund our retirement plans. There are just too many things that have to be paid for right now, we can’t find any money to put away for later. Right?
I’m not going to sugar coat this. If you’re not saving for retirement, you’re making a HUGE mistake.
Let’s take a peek at your golden years with little or no retirement savings…
Option 1: Continue working. With no retirement savings you’re most likely going to have to work well into your 70s or even beyond. Even if you love your job, this is a pretty daunting vision. But what happens if you can’t work for some reason? How will you support yourself if you get hurt or develop a medical condition that prevents you from working?
Option 2: Lower your standard of living. While most people assume that their expenses will go down in retirement (i.e. their mortgage will be paid off), the opposite is actually true. Prices for everything will rise, probably more than you predict. And even if your house is paid off with no 2nd mortgage, there are always medical expenses to consider. Insurance premiums and copays will be about 20-25% of your spending in retirement.
Option 3: Become dependent on your children. Though I’ve joked with Miss O about moving in with her when I’m old so she “can take care of me for once,” I don’t really want to do it. Not only do I value my independence, I would never want to burden her with my mistakes. Unless she’s the next Oprah. Then I’ll totally let her take care of me.
Remember that, while I don’t endorse the idea of going in to debt unnecessarily, you can borrow money for nearly every purpose in life. Every purpose, that is, except for retirement. College? Loans, scholarships, grants, work study, and more. A new home? A new car? Medical expenses? Emergency car repair? There are loans for all of them.
There are no loans for retirement. You’re either prepared, or you’re not.
I’m going to go ahead and assume that you’re convinced. So let’s move on.
How much should you be saving?
The short answer is; As much as possible. The new retirement savings goal for people aged 35 and under is $1,600,000, and that’s assuming you will collect Social Security. If that number doesn’t make your jaw drop, I don’t know what will.
The good news is that you don’t have to save $1.6 million. Retirement accounts are investment accounts and will (hopefully) grow over time. Don’t ask me how it works, but I think it has something to do with that compound interest formula I learned in 5th grade. Good thing, too. Saving that much on your own would mean you’d have to put away $40,000 a year.
And now for the not so good news. The closer you are to retirement, the more you have to start saving right now. I strongly advise you to talk to a financial planner to figure out how much to put away. Until you’re able to do that, something is better than nothing.
How much can you save?
According to the IRS, you’re allowed to contribute up to $18,000 to a 401(k) in 2015 and up to $5,500 to your IRAs (traditional and Roth combined). If you’re over 50 years old you’re permitted to contribute more in order to “catch up” before you retire.
The IRS has a surprisingly easy to follow website if you’ve got questions. Check it out here.
Are you saving for retirement? How do you make room in your budget?