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.
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