Retirement saving doesn't have to be painful, but the longer you wait, the harder it will be to catch up. That can be hazardous to your financial health. If you think it will be difficult coming up with the funds now, consider how hard it will be in the future.
While this example assumes a $1 million nest egg by age 65, this amount may not be appropriate for everyone. For some, it won't be enough.
According to Morningstar, the following monthly amounts are needed to accumulate $1 million by age 65 assuming an annualized 7% compound return:
Retirement Saving – Delay Only Makes It Harder
Age 25: $381 per month to accumulate $1 million by age 65
This is a big number for many 25 year old's especially considering the job market and the level of student debt many graduates are faced with. To put this amount in perspective, it is the about the same amount as the average used car loan payment which is $371 according to Experian.
Age 35: $820 per month to accumulate $1 million by age 65
This is very close to the average monthly house payment of $1,015 according to the latest American Housing Survey from the U.S. Census Bureau. Of course, depending on where you live, this amount could be much more.
Age 45: $1,920 per month to accumulate $1 million by age 65
This is a little more than the expected monthly expense of $1,730 for tuition, fees, room and board for a public 4-year school (in state) according to CollegeBoard.com.
Age 55: $5,778 per month to accumulate $1 million by age 65
This is equivalent to a gross annual salary of $69,336. This is a huge number and very few could save this much. If this was your salary and you had $0 expenses, it still wouldn't be enough because taxes would take a huge bite.
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The level of sacrifice increases with age when it comes to retirement saving. While many are under the impression that it will be easier to start saving later when your income is higher, the reality is that it becomes much more difficult. Despite the fact that our incomes typically grow, so do our expenses and financial obligations in general.
If you think it's hard saving $381 at age 25, think of how hard it will be trying to save $1,920 at age 45. It is never too late to start saving, but the sooner the better. Retirement saving is a process, not an event. Doing it now will make it easier to afford the things you need in the future.
Retirement saving is hard. It’s like any other endeavor. When things get challenging, bad excuses come popping out of the wood work. My high school football coach always told us that “excuses are like (blank), everybody’s got one and they usually STINK!” Avoid making these excuses and you'll have a much better chance at retirement saving success.
Retirement Saving – Avoid These Common Excuses
Excuse 1: I’m saving for my kids college education.
This is one I hear a lot. As a parent, I get it. We love our kids and we’re used to putting them first. When it comes to saving and creating a strong financial foundation, it is critical to resist the urge to put college saving before your retirement. At the end of the day, you can’t take out a loan to fund your retirement. You either have the funds or you don’t.
There are other options when it comes to paying for school. There are grants and loans and the potential for academic or athletic scholarships. You can also save significant amounts of money by going to a community college and transferring to a university. Your retirement saving should come first. It’s similar to airplane oxygen, put your mask on first, then your child’s! Otherwise, you both might be in trouble.
Excuse 2: My company 401(k) doesn’t match my contributions.
This is one of the better “outs” for not saving for retirement. There are some companies that don’t offer a match on the employee’s contributions but that’s not a good reason to throw up your hands. Even without a company matching contribution, there is still a HUGE reason to sock money away. It’s called pre-tax dollars. When you defer a portion of your pay, you are reducing your taxable income. The more you contribute to your 401(k), the more you save in taxes.
Excuse 3: I don’t trust the stock market.
There are many investment options available that are designed to be stable and limit exposure to the stock market. Whether it is a good investment strategy to invest in low risk investments over a long period time is a separate subject. There are plenty of reasons to be skeptical about the stock market, but don’t let a lack of trust stop you from reaching your goals. Despite its risks, the stock market is a critical part of long term wealth accumulation. I don’t trust most of the drivers on the road and there are plenty of risks, but I still drive. If I don’t, I won’t get anywhere!
Excuse 4: I don't make enough to save for retirement.
Many people feel like they don’t make enough money to save and invest. This is especially the case when you’re just starting out. However, it only gets more challenging as you get older. The natural progression is that as you grow in your career, your income will rise. But so do your expenses! This is where so many people go wrong. They wait to start saving and investing until later in life.
You don’t need to become an expert at investing to successfully save and invest for the long term. There are many things that are outside of our control and we tend to focus on those. Instead, sticking to basic fundamentals can go a long way.
Excuse 5: Stock market is too high and due for a crash.
Timing the market can be a tricky thing. It requires that you make two perfect decisions. The first decision involves timing the buy just when the market pulls back and hits a “low.” The second is timing the right moment to sell when markets reach a “high.” This is very difficult, if not impossible to do consistently.
This is why many financial planners and investment advisors suggest a disciplined long term investment plan rather than trying to time the market. If you want to be a trader, that’s fine. I not suggesting that they are bad or doing it wrong. But trading is different than investing. This is especially the case if you are investing for the long term.
The fact that stocks are at all-time highs doesn’t mean a downturn is right around the corner. Regardless of the current level of the stock market, one should always assume that a downturn is possible.
Let your risk tolerance, investment objective, and time horizon be your guide. If you need these funds within 12 to 24 months, the stock market isn’t the place to be. But if you have a longer term horizon, I would caution against trying to time it.
Don’t let the excuses slow you down. Retirement may seem like a long way off but it will be here sooner than you think. Remember, “excuses are like (blank), everybody’s got one and they usually STINK!”
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2020 Financial Planning Cheat Sheet
Your guide to 2020 tax rates, retirement contributions, and Social Security.