If you’re just starting out in your career, there’s a good chance that you haven’t given much thought to saving for retirement.
That was certainly the case for me when I landed my first real job more than two decades ago . Back then, I was just grateful to get my foot in the door, let alone worried about saving for something a long way off. In that regard, I had a lot in common with many of today’s young professionals.
Thankfully, my mother urged me to take the long view early in my career. Her first reaction, each time I proudly announced the news about landing a good job, was to ask about the retirement and other benefits that are offered. I remember thinking: can’t you just be happy for me?
However, looking back, you can bet I’ll be taking the same practical approach with my boys when they enter the job market. As a financial adviser specializing in retirement income planning, I’ve come to really appreciate how important it is to start saving early and how hard it can be to make up for lost time.
Unfortunately, nearly a quarter of the American workforce has almost nothing set aside for retirement. According to a recent study by the Employee Benefits Research Institute, 26 percent of workers have less than $1,000 in savings and investments.
If you’re young and haven’t begun to save for retirement, here’s why it’s critical, now more than ever, to do so and how it’s possible even on a starting salary:
Many Baby Boomers have retired with traditional, defined-benefit plans as well as Social Security benefits and their own savings—components of the proverbial three-legged "retirement" stool.
But the number of defined-benefit plans that pay a lifetime annuity (often based on years of service and final salary) has been steadily declining. In the private sector, the number of defined benefit plans plummeted from more than 145,000 in 1988 to less than 50,000 in 2014, according to the Department of Labor.
Even in the public sector, such plans are no longer as secure as they used to be. Just ask city workers in Detroit. As part of its plan to emerge from bankruptcy in 2014, Detroit cut benefits (as well as cost-of-living increases) for thousands of active and retired city workers.
In addition to the shakeout in the defined-benefit world, the Social Security trust fund is being depleted because of demographic shifts. If the system isn’t reformed, retirees may eventually face painful benefit reductions.
Fifty years ago, Americans could expect to spend roughly 10 to 15 years in retirement, but the long-term uptick in life expectancy means that many of us will live for decades in retirement. Living longer is a good thing, of course, but it can be expensive, especially when it comes to health- and long-term care costs during retirement. Out-of-pocket spending on medical care tends to increase during retirement, and health-care costs have been rising faster than the rate of inflation for a long time.
Keep in mind also that the cost of long-term care can be significant and easily erode your savings. Medicare, the federal health insurance program for seniors, typically provides only limited long-term care coverage, and to be eligible for Medicaid you must have next to nothing in the way of assets.
If you’re young, you have a number of advantages over those who push off saving for retirement.
For starters, young investors are able to potentially maximize the power of compounding by letting their savings grow over a long period of time. That can take the sting out of saving by allowing you to start small.
For instance, in a hypothetical scenario where an investor starts saving $200 a month at age 25 and earn a 5 percent yearly return, the investor may have about $350,000 at age 65. But if the same investor waits until age 35 to start saving, they will have to put away almost $370 per month (or 85 percent more each month) to reach the same amount at age 65. Please note the earnings are compounded and reinvested in this scenario and do not take into consideration any tax implications and their effect on the investment. Actual results will vary, this type of plan does not ensure a profit or protect against loss in declining markets.
Even when money is tight, it’s often possible to free up some for saving by making small sacrifices, such as cutting back on your trips to a local coffee shop or going out to eat less often. Track your spending and make a budget in order to identify places were you can cut back on discretionary spending.
No matter what your age, consider taking advantage of employer-sponsored retirement plans that offer matching contributions. By not participating in such plans, or not saving enough to get the full company match, many workers leave a lot of “free money” on the table.
If you are still on the fence, consider this: the longer you wait to start saving and investing, the less time you’ll have to ride out the inevitable ups and downs of the market. People with a short time horizon often invest more conservatively than those who are a long way from retirement and may pay a price in terms of lower returns.
There’s no shortage of reasons to get a jump on saving for retirement. Sometimes all it takes is a little nudge from a well-meaning parent, and some guidance from a financial adviser who can help get you on track and help you stay there.
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