I think we can all agree the last thing we want to think about is saving for retirement. It's so far away for us 20 and 30-year-olds that it just doesn't feel like we need to think about it now.
We have so many other priorities to take care of. People have student loans to pay off, rent to pay, if you're starting a family, maybe a down payment on a house and of course paying for that kid you're planning on having is definitely gonna demand some attention of yours.
And on top of that, you need to have a good time every now and then to keep your sanity. I mean what's the point of working so hard just for the sake of it if you're not even gonna allow yourself a break once in a while?
But the reality is, the sooner you start thinking about retirement, the less you'll have to sacrifice down the road if you start saving in your early twenties. Sometimes people can get out of control spending on lavish vacations and expensive clothes that in the end won't make a difference in your life and won't even make you happier for more than a few weeks.
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Retirement is meant to be spent relaxing, looking back on your accomplishments while enjoying your time riding into the sunset. But in order to do that, you obviously need a nest egg to support you. Unfortunately, GOBankingRates reports 56% of Americans have less than $10,000 saved for retirement.
I can't even support myself on $10,000 annually living in the New York City area today.
And yet, I still miraculously find a way to contribute to my 401k plan up to the matching limit and save literally $1,000 a month at least while paying the entire rent for my girlfriend and me.
Just kidding, it's not a miracle, it's actually not that hard. You just need to get your priorities straightened out. It's one thing to set a goal of retiring at a specific age with a certain amount of money. But if you're not taking daily action to reach that target, then what's the point?
If you find yourself buying lunch every day and going to the bars every weekend, then you need to reassess your habits. You'll never be able to save enough if all you're doing is pissing away your money (literally) at the bars. If you really have to, then go to the nearest store and buy a six-pack. You can get a decent six-pack of beer for $12 where I live. Instead of paying $8 per beer and $48 for 6 of them, you pay $2 for a beer and save $32.
My girlfriend and I hardly ever go out. We still have a great time regardless and we don't feel like we're missing out on anything. We have our own fun. We either order wine on sale online by the bulk or go to the liquor store to get beers or whatever. We'll end up either binge-watching a show, watch a movie or play some Mario Kart on N64. I never get to be Yoshi it pisses me off.
But we still have a great time and we feel better about ourselves the next morning because we didn't spend $100 in one night out!
And even if you don't have access to a 401k plan through your job, you need to find a way to save more for retirement. I use my company's 401k matching plan, but that's not all I use. If I relied on just that, it would take me forever to retire.
I also have a Roth IRA and my traditional brokerage account. Since I'm not saving for a house anytime soon and don't plan on moving into one in the near future, I put my savings in there to invest and grow. And by near future, I mean 5 years. It just doesn't make sense for us to move into a house at the moment while we aren't married, don't have kids and she is paying off student loans.
Between these three accounts, I have about $92,000 saved.
Even if I were to stop saving and left the $92k alone in an index fund at an average 7% performance for the next 40 years, it would turn into $1,377,650. And that's not even including dividends! If I were to contribute up to my company's matching plan every year and my salary never increased from $65,000, I would have $3,182,650. Even from never increasing my salary or contribution rate, I would still have this much.
If I were to start 20 years later, I would have only $726,671 at the same savings and interest rate.
I know it seems like I have a lot saved already, but keep in mind I did take advantage of living at home for 5 years after college but I also live in one of the most expensive areas of the country. Depending on your situation if you're living in a cheaper area, it may balance out, allowing you to save more once you graduate school if you went to college.
The point is to just take advantage of the opportunities that come your way. If you're lucky enough to live at home and have your parents still support you, great, stay home for a few years. There's no rush. If you have a chance to live with multiple roommates to make the rent cheaper, do it. There are always ways to get around to saving more.
Reasons to save now:
- Retire sooner or be able to retire at all
- The miracle of compound interest
- Can have a great life after working so hard for years
- Don't have to rely on your children
I don't have anywhere near the amount JP Livingston has yet, but it's a start. She was, after all, making over $100k right out of school between her salary and bonus. But she took advantage of this opportunity to save 70% of her income. She had her priorities in order to achieve the goal of early retirement.
She wasn't saying her goal was to retire early and then go out every night spending money on drinks, living in one bedroom apartment by herself in New York City. She made sacrifices like anyone has to in order to achieve their goal. But if you read her blog it was so worth it to her in the end. At the age of 28 years old she was able to retire!
Anything worth pursuing is never going to be easy. If it was, everyone would do it. But one day you'll thank yourself you chose not to go out every weekend.
Savings rate by gender:
It's interesting to note the savings rate doesn't differ very much between genders. There was a difference of only 3% more savings done by males. But it's still pretty terrible. Apparently, 33% of males have $0 saved while 36% of females have $0 saved for retirement:
Really, I don't know what they're thinking. They'll never be able to retire. It only gets harder the fewer amount of years you have to save.
In the study it also found 42% of millennials ranging from 18-34 years old don't have any retirement savings whatsoever:
The worst thing you can do is not look out for yourself first and foremost above anyone else. Think of it like when you're going on a plane and they give you the demonstration of putting on the oxygen masks. They always tell you to put yours on first before helping others like your kids or young siblings.
This is the money version of that. Your retirement savings is your oxygen mask to help your children later on. If you can't even help yourself out first, there's no way you're going to be able to help your future kids or other family members. You need to think long-term here.
What happens when you're old and have no retirement savings? Who's gonna take care of you?
Probably your kids.
Don't become a burden to your family members
You're gonna become a huge pain in the ass later on if you don't straighten your situation out. Your family members may even end up resenting you. You become a burden instead of a joy to be around just because you neglected to put yourself first. If you're not saving for retirement in your 20's, your future family may very well pay the price.
You're actually helping them out the most by putting yourself first and making sure you're saving enough for retirement when you're young. You're doing them the biggest favor possible.
For example, one of my best friend's grandmas lives in his parents' house. She has her own “apartment” area set up in the back of the house. But it's a small house, only one and a half floors. Her area is literally like a studio-sized apartment you'd find in New York City, like a dorm room or something.
When I was little I would always go to his house and she was always there. I had no idea why I just thought maybe my friend's dad was being really nice and letting his mom's mom stay with them. But now that I think about it, it's most likely because she didn't save anything and they can't afford to have her in a retirement home. I know nothing about it, but it could possibly have put a strain on the relationship in the earlier days who knows! The point is, don't be that parent!
Shocking facts about baby boomers:
- 1 in 3 baby boomers have $0 dollars for retirement
- 22% between the ages of 55-64 have $300,000 or more saved (not even close enough)
- 29% of people 65 and older have $0 saved for retirement
If this isn't a wake-up call for you guys, I don't know what is. With social security likely to be even less by the time we get that old and pensions becoming a thing of the past, all we have to rely on is ourselves. The old days of staying with one employer and gradually moving up the ranks with a pension in line are over.
Here's a chilling infographic showing how much retirement savings people have right now:
This is a joke, honestly, everyone in this chart is screwed. $500,000 isn't even enough unless you're living in like Thailand or something. How are you gonna live on just over $16,000 a year for 30 years (500,000/30)? If you follow the 4% rule with that it's even worse!! You'll spend $20,000 a year and be out of money in 25 years!!
And your advisor is telling you to put more money into cash and bonds at that age, give me a break. You'll be doomed for the rest of your life if you follow the rest of the country on this path.
And you always, always, always need to consider inflation when thinking years into the future. Don't think $1 million is going to do it for you. To have the same buying power as $1 million today, you will need $3,262,038 in 40 years assuming the average rate of inflation at 3%. Get. Saving. Now.
Don't be like these guys:
Sure, saving aggressively later for retirement can make a difference, but why do that to yourself? If you're starting with $100,000 at the age of 55, it's basically game over for you, I'm sorry you're gonna have to work the rest of your life. I have almost that much now and I'm 28. People don't want to hear it, but that's the reality. $800,000 isn't going to come close enough for retirement years from now. Don't buy into these charts, it's misleading to think this is all you're going to need for retirement.
One of the only reasons these figures are so low is because they probably figure if they tell their readers the reality of the situation, they won't visit their sites anymore. Nobody wants to hear they didn't save enough for retirement, but hey most didn't.
Why aren't people saving for retirement?
Well for one, it seems so far away, that it doesn't matter if we put it off for a few years. But the truth is these are the years when you should be taking advantage. Chances are if you're in your early 20s or any part of your 20s for that matter, you may not have a family or even wife/husband. This is when you should put as much money as you can into saving for retirement.
Chances are you can save even more than you believe.
One great way to make yourself save for retirement is to picture an older version of you. The problem with retirement being so far away is people feel disconnected from their future selves.
They also believe their savings rate is enough. A middle-class family with an annual income of $50k saving 10% is doing better than the average person. But, that's misleading because that statistic implies that's good enough. It's not even close. It's just more bad advice. The average person is doing a terrible job.
Check out how long it'll take you to retire with that savings rate. If you want to save 5%, you won't see the light of day until 66 years later. Crank that savings rate to 5x more, you'll retire in less than half that amount in 32 years.
If you can find a profitable side gig like blogging, you could potentially crank up that savings rate to even 60% depending on how successful the blog is and what your lifestyle is like. That would drop your working years to 12 and a half years. This, of course, is assuming you live off 4% of your savings and have flexibility in spending during down times. But you can really help yourself out having a side gig and saving more.
This is why I bring it up as often as I can. I know it seems redundant at times, but unless you see it in text for yourself, you don't realize the significance of it. You don't truly understand how much of a difference saving money making lunch at home and drinking coffee at work instead of going out to eat and drink and then putting that cash towards investing for your retirement can make until you see it in numbers.
I always try to show you how X amount saved and invested at an average market rate for 40 years turns into a larger amount because it can be difficult to think that far in the future. I know for myself it always helps me keep myself in check.
Keeping your money in the market without taking it in and out is also huge. A lot of people don't realize these fees are your version of a death by a thousand cuts to your nest egg. You could very easily miss out on the biggest gains of the year because you panicked when the market dropped and sold your investments.
Like I said before, some think if you prioritize retirement savings, you won't have fun now while you're young. One of my friends from home is the perfect example of this. She essentially got herself fired on purpose from her marketing job in the city because she wanted to “enjoy life now”. She would go to the beach on a Tuesday and come back on a Friday or take a 4 day weekend multiple times during the summer. She wouldn't even tell anyone at work she was doing this sometimes.
She really just wanted to lose her job without actually saying she quit so she could find another position that would give her the flexibility to live in the now. So naturally, that job was bartending.
Long story short, she put off saving and 3 years later after bartending and having a freelance photography job, she's working at a real estate company in a marketing position. Which is essentially back to where she was, but now 3 years behind in her career and savings. If she had continued working, she would've had so much more savings for retirement if she was focused and prioritized retirement above all else.
Steps to take to get that financial freedom:
- That's as easy as it gets for a first step; if you haven't started yet, get to it
- Take a look at your expenses and see what's not necessary and cut that out to free up some saving; do you really need to order take out every week?
- Of course, as much as you want to save is up to you, but the charts don't lie; if you want to retire earlier, increase that savings rate!
Do the homework:
- A perfect place to start is my recommendations page
- Those books helped me get to where I am and where I'm going to get to retire as soon as I can
- Don't blindly dump your money into a fund just because everyone else is doing it
- You need to make decisions based on sound research or else you may end up losing all your money
Find a brokerage firm or investment advisor:
- find a place to put your money to work
- you can either invest your money yourself through a brokerage account or have someone do it for you
- these are the only two options to get started
- I use Charles Schwab and manage the money myself; I'm still under my parents' account because I don't incur any trading fees because of the way our whole family account is structured
- I also got rid of the advising part from the guy designated to our family, because it was a $300 annual fee for him to put my money in expensive mutual funds
- Don't get me wrong, I love Charles Schwab, but it's great only if I take matters into my own hands
- I also heard Vanguard is a great option with very cheap index fund options for people in their 20s and 30s, so you should definitely check them out as well if you're shopping around
Decide what to do with your money:
- Now you'll need to decide where you want to put your money to work
- If you're willing to put the effort in and the tremendous amount of research that goes into properly picking stocks, by all means, go for it
- But you'll need to compare that company to their competitors, if they're a leader in their industry, if the stock is cheap, if the P/E ratio is lower than the average in their industry, read the annual report, etc.;I personally find this stuff interesting so I don't mind, but it's not for everyone
- You may be better off investing in an index fund like the S&P 500 index
Watch your portfolio:
- This is the fun part!
- Granted, you shouldn't obsessively check it if you're going to panic when the market drops like it recently has with the largest single-day drop in the history of the DOW
- I won't lie, it provides a bit of immediate gratification seeing your hard work pay off on the days the market does go up
- But if you're going to be influenced on a day-to-day basis, don't even bother checking it except for maybe twice a year
Repeat the steps and be patient:
- It takes a while to build up a portfolio with an amount large enough to sustain you for all of your retirement
- As always, anything worthwhile doesn't come easy
- Trust me, if you read the books I've read, everything will seem much clearer and you'll even start to enjoy the process
I hope this helps you guys figure out how you want to plan to save for retirement going forward. At the very least, hopefully, it's a warning sign what can happen if you don't put yourself first.
What are you guys doing to improve your savings rate?
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