Audio (Part 1 & 2):
It’s hard to look at retirement statistics and numbers across generations, because of proportionality. Baby Boomers (born 1946-1964) have saved the most, followed by Generation X (1965-1978), and then Millennials (1979-2000).1 And of course that makes sense because the older you are, the more time you’ve had to save.
But there’s a wide range from the beginning of a generation to the end, and we simply don’t know how much the younger generations will have in retirement by the time they actually get there.
In the Baby Boomers’ days, it was common for companies to provide pensions, but we all know in today’s world that pensions are about as common as lottery winners. And they’re getting rarer every day. Then there’s Social Security, which pretty much no one is relying on now, unless they’re already receiving it.
Kids These Days
I feel old talking to young adults now, because I find myself saying things like “wow, kids these days don’t want to save for retirement.” That’s hilarious… “kids these days,” yeah I apparently say that now. I’ve accepted that I am old. So we can move on. The point is, a lot of young adults (18-22 age range) don’t see the need to invest for retirement.
It’s becoming more common to hear “Why plan for retirement? I may not even live that long.” When kids hear you can’t pull money out of a retirement plan without penalties until you’re 59 1/2, they don’t even see the point.
So what is the point? Why invest for retirement? I’ve come up with eight reasons why everyone should save for retirement as soon as they can.
1. Starting Young is Easier & Cheaper
When you start saving for retirement in your early 20s, it will cost you less money. You don’t have to put nearly as much of your check away to make a huge difference in retirement. Here are some numbers on saving $1.7 million, which is a generalized amount people need to officially retire (with an also generalized 8% rate of return):2
If you start at age 25:
With an 8% rate of return: $486.97 per month
- Annual salary needed if you save 10% of your income: $58,436
- Annual salary needed if you save 15% of your income: $38,959
If you start at age 30:
With an 8% rate of return: $741.10 per month
- Annual salary needed if you save 10% of your income: $88,932
- Annual salary needed if you save 15% of your income: $59,291
If you start at age 40:
With an 8% rate of return: $1,787.54 per month
- Annual salary needed if you save 10% of your income: $214,505
- Annual salary needed if you save 15% of your income: $143,011
It may seem like common sense, but it may be even better than you thought to invest earlier, and here’s why…
2. Compound Interest Does the Work
It doesn’t take much each month to create a huge retirement nest egg, if you start early enough. Everyone is cutting pensions. Even the military is cutting retirement back, and having servicemembers rely more on compound interest in the stock market to do the work.
The way compound interest grows your money exponentially is a phenomenon, and if nothing else, it’s just fun to watch.
I know we looked at numbers in the last point, but here are some more…
Let’s look at the difference between saving $200/month from age 20, as opposed to starting at age 40. How much will you have when you’re 60?
- $200/month (8% interest) from age 20 to 60: $671,474.50
- $200/month (8% interest) from age 40 to 60: $118,615.01
The funny thing is, when you start at 20, you only put in $48,000 more over the 20 years you invest before the 40-year-old started, yet at 60, you have $552,859,49 more. Why? Because compound interest.
After a few months, you won’t even notice $200 coming out of your monthly budget, but you’ll notice having over $500k more when you retire.
And because you started younger…
3. You Can Take More Risks
It’s an old adage that you can take more risks with your money when you’re younger, and it’s true. You have the time to recover if you mess up. When you start in your 20s, you can try many different paths to see what you like and what works.
Want to invest in individual stocks? Sure, it’s pretty much been proven that practically no one can successfully pick winning stocks that outperform the market over the long haul, but who knows… you may be the next Warren Buffett or Peter Lynch.3
If you are the next stock rockstar (stockstar?), and you’re in your 20s, you have a bright financial future ahead of you. If you figure out you’re not, it’s better to learn that in your 20s, than your 40s.
4. You Don’t Know What Will Happen
On the flip side of taking risks, you don’t know what will happen when you get older. God forbid an accident or disease come your way, but if that happens and you’re investing now, you’ll be ready for it.
You don’t want your children paying your retirement or your medical bills simply because you refused to start investing for retirement early on. There’s at least a 1 in 10 chance you’ll be disabled before age 64, and once you hit 65, there’s a 1 in 3 chance.4
Don’t take that chance. Even if you don’t have a family right now, prepare for when you do. It could cost your family up to $700,000 to care for you if you don’t prepare properly.5 That’s $700,000 out of your family’s pocket because you didn’t plan ahead.
Oh, and do you like free money? That’s another incentive to start early.
5. You May Get Free Money
If your employer offers a match in your retirement account, that’s free money. That’s a 100% return on the amount you put in that they match.
If you don’t do anything else for retirement, at least get that match.
I’ve heard of companies offering the typical 4%-6% match, and I’ve heard of other companies offering a 100% match. Put everything you can into that retirement account to get that match. Even if you withdrawal early and take a 10% hit, you still got a match for all those years.
6. You May Live Longer Than Expected
Yes, we’re living longer and longer as technology and the medical industry progress. That’s a well-known fact. You don’t want to outlive your money.
The idea would be to save enough to cover you and your family, for whatever comes your way, but make sure your calculation is far enough out. You’d be surprised how many people only project out to age 70 or so.
If you project to 70, and live to 90 or 100, that’s over 30 more years you didn’t account for. Depending on your gender, race, and genetic background in general, you could live much longer than expected.
Women tend to live longer than men, and there are plenty of YouTube videos out there that will show you why. But the fact remains, a woman, statistically, will live longer. For example, the average life expectancy of a Hispanic female is 84.6 That’s the average.
It’s not just about living longer than expected and planning for the worst, it’s about much more than that…
7. You’ll Leave a Legacy
“A good man leaves an inheritance to his children’s children.”Proverbs 13:22
How important is it to you to leave a legacy? To leave enough money to your children so they feel like they could do anything? But as Warren Buffett says, not so much that they feel like they don’t have to do anything.7
Leaving your legacy is all about preparation, and if you start preparing easily in your 20s, it will almost happen by default.
Could you imagine being able to live an inspired and fulfilled life, and pass that down to your kids? Your name would live on, and you would give your kids a boost that you may have never had.
8. If Nothing Else, It’s a Fallback Plan
If you don’t care about any of the other reasons, a retirement plan (even a small one) is a nest egg that you can fall back on. Why not save a small amount of every check—an amount you won’t even notice—to have that nest egg?
If you want the money now, and you don’t think retirement is worth it, first I would ask you to read up on delayed gratification a little. But next, I would say, why not save something? Even if it’s only $50/month. You may decide later that you want a retirement, and you want to leave a legacy. You’ll have quite the head start if you do.
Retirement May Not Mean What You Think
It’s a common misconception that retirement means you stop working entirely, and are basically waiting to die. It doesn’t mean that at all. Retirement means financial freedom. Once you hit that point, whether at 40 or 70, you can do what you want without financial worries.
Many people started the greatest projects of their lives in retirement:8
- Col Sanders started KFC in retirement when he received his first Social Security check at age 65
- Noah Webster completed his American English Dictionary at age 66
- Ronald Reagan got in to politics at age 55
- Ray Crock started his model of McDonald’s at age 52
- Sam Walton was nearing 50 when he opened the first Walmart
All of these things happened in the “retirement” years. So retirement doesn’t have to fit the perceived model of sitting on the front porch sipping sweet tea all day.
What’s important is that you start investing something now.
Further Book Reading
- The Total Money Makeover by Dave Ramsey
- Make Your Kid a Money Genius by Beth Kobliner
- Money Monster or Money Master? by Norma LaFonte
- Moneybags: A Guide to Teach Your Kids About Money by Wendy Gillespie
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- K, Brockman. (2019, April 21). Here’s How Much Workers Across Every Generation Have Saved for Retirement. The Motley Fool.
- E, Martin. (2019, August 17). Most Americans say you need $1.7 million to retire—here’s how much money to save each month to get there. CNBC.
- M, Schmidt. (2019, June 25). Is Stock Picking a Myth? Investopedia.
- Institute on Disability/UCED. (2016). 2016 Annual Disability Statistics Report. University of New Hampshire.
- L, Light. (2015, December 15). Here’s Why You Need to Save for Retirement, and it’s Not Pretty. Forbes.
- Arias & Xu. (2019, June 24). United States Life Tables. CDC.
- K, Elkins. (2016, September 26). Bill Gates and Warren Buffett on How Much to Leave Your Kids. CNBC.
- M, Weiss. (2018). People Who Did Great Things After 50. Ranker.