We might live to 100! How cool is that?
More years of playing golf, rocking on the porch, reading books … and paying for it all.
The World Economic Forum (WEF) recently assessed the growing “retirement savings gap” in its white paper “We’ll Live to 100 — How Can We Afford It?” That’s the difference between the amount of money we’ll need in retirement versus the amount we’ll actually have.
And the results are pretty dire. Here’s how much to save for retirement and why you need to start today.
What’s the problem, anyway?
To put it simply, we’re living longer and having fewer babies.
So, although the workforce is shrinking, the retired population is exploding — and there’s not enough money to support it.
Assuming the retirement age and birth rate both stay the same, the ratio of workers to retirees will drop from 8-to-1 today to 4-to-1 by 2050, according to the WEF.
In addition, the WEF reported, fewer employers are offering pensions and individuals aren’t saving enough money themselves.
This situation has led to an enormous gap in the amount of money retirees will have versus the amount of money they’ll need. And when I say enormous, I mean trillions of dollars:
By 2040, we’ll be missing a total of $400 trillion worldwide — five times the size of the current global economy — and $137 trillion in the U.S. alone.
“The anticipated increase in longevity and resulting [aging] populations is the financial equivalent of climate change,” said Michael Drexler, one of the report’s editors. “We must address it now or accept that its adverse consequences will haunt future generations, putting an impossible strain on our children and grandchildren.”
He’s right. If it’s tough to motivate yourself, think about your kids or your nieces and nephews. By preparing now, you’ll prevent yourself from becoming a financial burden.
“Plan for your retirement so you won’t have to depend on your kids when you’re older,” said Sophia Bera, financial planner at Gen Y Planning. “It’s one of the best gifts you can give them.”
Here’s how much to save for retirement
Ready to take responsibility for your retirement?
To start, figure out how long you might be lucky enough to live:
Then, given your life expectancy, decide how much you’ll need to save for retirement.
Every situation is different, but here’s an example (one that hopefully will scare you into starting today). Let’s assume the following:
- Retirement age: 67
- Number of years in retirement: 30
- Income: $35,000
- Desired retirement income: $26,250 (75 percent of current income)
- Inflation rate: 3 percent
- Average annual return on investment: 7 percent
- Social security payout: $0 (better to be safe than sorry, right?)
Based on the CalcXML retirement calculator, here’s how much you’ll need to save for retirement, depending on how old you are when you begin:
- Age 21: $312 per month
- Age 31: $507 per month
- Age 41: $880 per month
- Age 51: $1,774 per month
Can you believe the differences?
If you start when you’re 21, you’ll need to save about $300 per month. Now, this is in current dollars — you’ll want to increase these amounts depending on inflation. Although that sounds like a lot, it’s manageable. With a $35,000 salary, it’s 10.7 percent of your income, which leaves nearly 90 percent for bills and fun stuff.
But if you wait until you’re 51, the amount becomes astronomical.
You’ll need to save nearly $1,800 per month, which is 60 percent of your income. And remember, at that point, you might have kids in college, a mortgage, and aging parents — in other words, even less money to spare.
Starting early also means you’ll need to invest less money in the long run.
Thanks to the power of compounding interest, the longer your money is in the market earning returns, the fewer hard-earned dollars you’ll need to contribute.
In the prior scenario, the 21 year old will have to put $172,224 toward their retirement. The 51 year old will have to save nearly twice as much: $340,608. That’s because the 21 year old will have 30 additional years to let their investment grow.
3 steps to start saving for retirement
Are your eyes open now? Are you ready to finally start investing in your retirement?
Here are three steps you should take to get moving.
1. Crunch your numbers
Although the above scenario might convince you to take action, it’s imperative that you run your numbers to determine how much you should save for retirement.
If you don’t like the CalcXML retirement calculator, there are plenty of other options — like this one from SmartAsset.
Play around with different calculators, see which ones work best for your situation, and then compare the numbers.
2. Take advantage of employer-sponsored plans
Does your employer offer a 401(k)? A 401(k) retirement account is funded with your pretax earnings, so you won’t pay taxes on the money until you withdraw it down the road.
If you aren’t saving yet, a 401(k) is a painless way to start. Since the money is taken directly out of your paycheck, you won’t ever have the chance to miss it.
And if your employer offers a match, even better. Make sure you contribute enough to get the full amount — or you’re leaving free money on the table.
3. Open an Individual Retirement Account
An Individual Retirement Account (IRA) is the next place you should stash your investments. There are two kinds: traditional IRAs and Roth IRAs.
For many people, Roth IRAs are a better choice because you can withdraw the money without penalty and, after retiring, won’t have to pay taxes on it. If you’re young and anticipate earning more in the future, then this is the way to go.
Here are two options to get you started:
- Vanguard: Deposit $1,000 to get started, and then create an automatic withdrawal from your checking account so you’re investing money each week.
- Betterment: This app lets you start investing in a Roth IRA with as little as $100 per month.
As tempting as it is, and as far away as your golden years might seem, don’t stick your head in the sand. The longer you wait, the tougher it’ll be to save enough for retirement.
Start today. Your future self — and your potential future children — will thank you.
Interested in refinancing student loans?Here are the top 6 lenders of 2018!
|Lender||Variable APR||Eligible Degrees|
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1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 5.87% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 5.87% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of Month/Day/Year, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 08/21/18. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at firstname.lastname@example.org, or call 888-601-2801 for more information on ourstudent loan refinance product.
© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
Savings example: average savings calculated based on single loans refinanced from 9/2013 to 12/2017 where borrowers’ previous rates were disclosed. Assumes same loan terms for previous and refinanced loans, and payments made to maturity with no prepayments. Actual savings for individual loans vary based on loan balance, interest rates, and other factors.
Application detail: 5 minutes indicates typical time it takes to complete application with applicant information readily available. It does not include time taken to provide underwriting decision or funding of the loan.
Instant rates mean a delivery of personalized rates for those individuals who provide sufficient information to return a rate. For instant rates a soft credit pull will be conducted, which will not affect your credit score. To proceed with an application, a hard credit pull will be required, which may affect your credit score.
Total savings calculated by aggregating individual average savings across total borrower population from 9/2013 to 12/2017. Individual average savings calculation based on single loans refinanced from 9/2013 to 12/2017 where borrowers’ previous rates were provided. Assumes same loan terms for previous and refinanced loans, and payments made to maturity with no prepayments. Actual savings for individual loans vary based on loan balance, interest rates, and other factors.
3 Important Disclosures for SoFi.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.47% – 6.99%3||Undergrad & Graduate||Visit SoFi|
|2.47% – 5.87%1||Undergrad & Graduate||Visit Earnest|
|2.47% – 8.03%4||Undergrad & Graduate||Visit Lendkey|
|2.95% – 6.37%2||Undergrad & Graduate||Visit Laurel Road|
|2.48% – 6.25%5||Undergrad & Graduate||Visit CommonBond|
|2.72% – 8.32%6||Undergrad & Graduate||Visit Citizens|