Why You Should Start Thinking about Retirement Now
(2 of 7)
Why You Should Start Thinking about Retirement Now
Advanced and advancing societies around the world are grappling with an explosion of elderly people, stretching resources and money. How it will play out, we can only forecast. It’s a new phenomenon, and many governments have not taken action despite having done the math years ago. But if you want to ensure that you will live comfortably in your old age, you will have to start thinking—and sacrificing—early.
Things To Know
- Retirement may be an exciting and significant chunk of your life. Your health and financial well-being will have a major impact on what those years will be like.
- How you think about retirement will depend in part on how old you are.
You should start thinking about retirement now because it may be a significant chunk of your life—maybe as much as a third. On top of that, you may not be in great health. One thing you do want is enough money to last for the remainder of your life.
What your age says about your attitude
How you think about retirement will depend in part on how old you are. A 20-year-old thinks about it differently from a 60-year-old. Yet if the same urgency that a 60-year-old has were present in a 20-year-old, the latter would take it more seriously and plan for it better. We often think of our future selves as though they were different people, which makes planning for old age seem like planning for someone else’s future. But if you think of your future self as your own, planning for it would become more urgent and prioritized.
Don’t give up so soon
Often, when people hear the numbers that financial planners tell them they need for a secure retirement—say, $500,000 or $1 million—they give up and decide to spend now and forget what lies ahead. But even setting aside small contributions (especially when matched by an employer) can add up over time and ease your anxiety. When you start early, you have the power of growth and compounding on your side. For example, setting aside just $40 a month in an account earning 5% starting at age 20 can get you over $108,000 in inflation-adjusted dollars by the time you are 60. And that’s just cash. You might also accumulate wealth in the form of property, collectibles, and other things that can be converted into cash. And besides that—your wages will likely increase as you age, enabling you to sock more money away. And if your employer can match your retirement savings, you just may hit that magic mark.
Isn’t this better than saying, "I can’t build up $500,000, so I’ll just quit"?
The advantage of time
The earlier you start, the more time you have to benefit from the potential growth of your invested money; also, you have more time to recoup losses from the ups and downs of the marketplace. The older you start, the less time you have for all this, and the more risk you will have to take in order to make your money grow.
Planning for retirement need not be hard. It takes some forecasting, some saving, and some periodic review of your plan. Budgeting your money can be easier if you can see it as a reward that will pay off when you can no longer support yourself.
An illustration
The chart below shows what a 401k plan could be worth after 43 years of your contributions, your employer’s matching contributions, a starting salary of $30,000/year, and yearly growth. This assumes that you started contributing at age 24 and stopped at 67. Even if you didn’t start saving until later in life, or if you retired at age 60, you could still build up a respectable amount of savings, courtesy of compounding and long-term growth. For example, just 30 years of saving under this scenario could build up to about $400,000.
This chart is for hypothetical illustration purposes and may not reflect your actual investing behavior or your actual earnings. However, the mathematical principles show the power of contributing to a retirement plan early and often.
Assumptions: $30,000/year income, 2% annual salary increase, 8% earnings rate, 6% contribution to your 401k plan, 3% maximum employer match, no other retirement plan. Earnings rates will vary, and may be negative. Actual results may differ substantially from that shown. This hypothetical illustration is not indicative of how any specific investment may perform. Past performance does not guarantee future results. Source: http://www.calcxml.com/calculators/qua05?skn=23.
