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If you’re in your 20s or 30s, you might feel you’re too young to plan for retirement. Especially if you're single. Or, at least young enough to not worry about it too much.  SO MUCH TO DO, NOT ENOUGH MONEY I get it. For starters, you’re still decades off from retirement. Besides, you have more important priorities, and your paycheck goes only so far. It takes money to hang out with friends, travel and see the world, and savor all that life has to offer. Money is precious, but so is time, and you definitely don’t want to miss out on life’s experiences. So move over YOLO (you only live once). Make room for YOYO (you’re only young once). There’s so much to see and experience and not enough time – and money. If YOLO (or YOYO) is not your thing, maybe you’re saving for your first house or condo and you just can’t afford to save more for retirement. Or, you may be married with small children, and with daycare and private school and piano lessons and trips to Disneyland, you’re up to your limit. You can barely eke out a tiny sum to put in your 401(k). But hear me out. I have 3 reasons why you should consider planning for retirement sooner than later.
NO MORE DEFINED BENEFIT PENSION First, let me paint a typical retirement scenario in your grandparents’ generation. He (yes, it was typically a he back then) would work for a large corporation, like IBM or Boeing, for 30 years. In exchange for a job well-done and loyalty, his employer would provide a pension benefit. It simply means that he gets a guaranteed income stream for as long as he lives – something like, 60% of his pre-retirement pay, depending on the plan and formula. He can, and often would, choose the option to continue the income to his wife if he dies before she does. Defined benefit pension (or simply pension) is entirely employer-funded. So your grandpa did nothing to contribute to it other than to work for his company for a long time. Some employers were generous enough to even subsidize all or most of health benefits during retirement. Sweet deal. Retirement planning for a lot of people was a different ball-game back then. Now, let’s fast-forward a few decades With some exceptions, the retirement plan of choice for most employers now is the 401(k) plan, which is nothing like pension. First, you generally use your own money to fund most of it. Second, it doesn’t provide guaranteed lifetime income. In the end, with a 401(k), it’s up to you to manage it and hope it would last through your retirement. If you run out of money, tough. PEOPLE ARE LIVING LONGER In a way, your grandpa’s company could afford to be generous because people just didn’t live that long back then. To put things in perspective, life expectancy in the U.S. when the Social Security Act was signed into law in 1935 was 58 for male and 62 for female. In 2020, it was 75.1 for male and 80.05 for female. It’s easy to see that people are living a lot longer today than they did when your grandpa was in the workforce. Maybe your parents are in their 50s or 60s and still look and act youthful. You may even know people in their 80s and 90s who are still healthy and active. Not having guaranteed lifetime income is bad enough. And potentially living much longer than your grandpa makes it even worse. So, you’re on your own…. Not only to save for retirement, but to make your money last through the decades after retirement. What might have been an adequate nest-egg a generation ago may not be nearly enough by the time you retire. So, the risk of running out of money during retirement is real. THE MAGIC OF COMPOUNDING Hopefully, you are now convinced, or at least open, to start saving for retirement with a sense of urgency. If you are still not convinced, you should know about the magic of compounding. You can read more about compounding in our previous post. But suffice it to say that the earlier you start, the more you’ll end up with, by far. Let’s say you start at age 25 and you want to save $1,000,000 by age 65. Assuming a 7% annual return, you need to save $4,681 a year. But if you start saving the same amount ($4,681) 10 years later at age 35, you’ll end up with $473,167 at 65, less than half of the $1,000,000 goal. If you start at age 35 and want $1,000,000 at age 65, you need to save $9,894 a year. That’s more than double the amount required at age 25. And that’s with only a 10-year difference! So, the moral of the story is… don’t wait, start now. If you are not socking away money in your company 401(k) plan, start right away. If you are already contributing to your 401(k), increase the amount or percentage of contribution. If you get a raise, consider putting away half of the amount of raise to your 401(k). Because you are on your own to prepare for a long retirement. We do not provide legal or tax advice. Readers should consult their own legal or tax advisor. There is no guarantee investment strategies will be successful. Investing involves risks, including possible loss of principal. There is always the risk that an investor may lose money. A long-term investment approach cannot guarantee a profit. Investors should talk to their financial advisor prior to making any investment decision. This information is intended for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services.
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