People are living longer and longer nowadays. Because of this, many retired Americans find themselves in trouble. They are too poor to retire and too young to die. In their 60’s, 70’s and even 80’s these elderly have to get up and go to work everyday to ensure they have a roof over their heads and dinner on the table. Sure, they collect Social Security payments, which in 2011 was an average of $1,180 a month, but how practical is it to live off of just over $14,000 a year? If you don’t retire with a military pension, could you survive off of this much money for the remainder of your life without working? There are always extenuating circumstances, but the real reason many of these older people can’t retire at a reasonable age is their failure to save ENOUGH money for retirement.
It’s human nature to think and plan in the short term. When I say short term especially when it comes to finances and savings, I imply even thinking out for 5-10 years. Will I get a raise at work? Can I afford a down payment on a house next year? How much will that baby on the way cost us? It’s difficult for us to grasp the importance of our money in the long-term, ie. 30 and 40 years from now. Not everyone plans on serving for 20 years and counting on that pension check from Uncle Sam. Even if you have that check to look forward to will it be enough to maintain your lifestyle at an older age?
It was common 50 years ago, that an American worker who was coming up on retirement could count on some sort of company pension to pay out for the remainder of their life. Pay into a company matched pension while you are employed for 30 or 40 years and when you retire collect on that until you kick the bucket. Contrary to that, we’ve seen a real shift from the way things used to be done. Employees aren’t as loyal to one company as they used to be, often venturing out for greener pastures. Companies treat employees equally as disposable, replacing older workers with younger, cheaper labor or machines.
Now more than ever it is imperative on the individual to think twice about how much they will need for retirement and plan accordingly now while there is still time to save. Will Socially Security even be an option when we retire? There are smarter people than I still debating this today. But I’ll be damned if I trust the government to come up with a plan to ensure that I live comfortably later in life. We can see how well that’s working out for some of our elderly even now.
Note: Pay off any of your high interest debt before considering investing in retirement. That debt is draining any return on investment you make!
Time Is On Our Side (Well Most Of Us)
Saving and Investing isn’t rocket science. It takes some time and research but ultimately it will be worth every penny later in life to DO IT NOW. Like right now, today. “The best time to invest is yesterday. The second best is today.” The biggest factor in your ability to invest your money and retire comfortably will be Compounding Interest. It’s as simple as that. Compounding Interest is money earned on a principle balance and then re-invested back into the principle balance. Then without withdrawing the money earned, you invest it the same way again. And again. And again, over time. Sounds complicated but it’s really not. For Example:
Lets say on Jan 1st 2017, you put $10,000 (principle balance) into a Retirement Mutual Fund that earns you a very achievable 5% every year.
5% of $10,000 is $500 dollars.
That means on Dec 31, 2017, you will have $10,500. You didn’t take that profit out and spend it because you know how important Compounding Interest is,
So, now on Jan 1st 2018, you invest that $10,500 in that same retirement mutual fund at %5.
5% of %10,000 is $525 dollars.
On December 31 2018, you now have $11,025 from that original $10,000. You’ve made $1,025 from doing jack shit. All you did was have your money in a retirement account that made 5% and didn’t take it out of the account.
Money earned for doing next to nothing
Just like you’re not going to get swoll your first time in the gym, it’s going to take time to get your retirement account swoll this way. I’ve said before there is no easy way to make a lot of money quickly. If there was, then everyone would be debt free and swimming in cash. YEARS. Many, many years is what it takes for your average person to become rich. No one wants to hear that but it’s true.
When it comes to retirement, your goal should be to get as much money as you can can afford, into your retirement account as possible, while you’re still young. The interest will have more time to compound on itself over the years. This is what I mean by time is on your side. It’s never too late to start of course, but you will have a huge advantage if you start early in life. I’m not talking a few years like above, I’m talking like 30 and 40 years. That’s how you make money.
You also don’t make money by putting in a one time amount of $10,000 into an account and letting it sit there for 40 years. Yes it will earn a bunch of money on top, but not as much as if you put like…$5,000 a year (aka a yearly contribution) for 40 years! You could set up an automatic withdrawal of $416 a month (or $96 a week) to go to this account. If you make $50,000 a year after taxes that’s only %10 of your earnings and could make you so much more than that in the long run!
The line in BLUE is the $5,000 or so, you contributed to the account on a yearly basis. It goes up steadily over time. The RED line is what that Compounding Interest earned for you over the same amount of time. It’s hard to grasp just how much more it will earn over a long span of time. It could be the difference between you living off of $15,000 a year when you retire, $50,000 a year or $100,000 a year.
One of the downsides people see to retirement savings is, in most cases you can’t touch this money without BIG penalties until you are 59 1/2 years old! Wtf mate, I have to wait how long?? Sorry but that’s how it is. Trust me however when I say you will be glad you waited until 60 years old to touch it because you don’t know how long you will live and need that money to survive off or pass down to your children to begin their lives.
Start thinking now about how much YOU can put away on a weekly, monthly, or yearly basis to get the most out of compounding interest. Here’s an interest calculator to help you get an idea of how that money will grow:
My next article will be about specific retirement accounts we have access to such as Thrift Savings Plan (TSP), employer 401(k), and IRA/Roth IRA and how to manage those accounts successfully in my opinion.