You’re Probably Not Saving Enough For Retirement

live150While this advertisement probably doesn’t apply to anyone who’s old enough to be reading this blog, it does shed light onto something most of us younger than 50 don’t think about–retirement.  The reality is life-expectancy in the US is at an all time high and only getting longer.  The current guinness world record holder for oldest person to live is a woman who lived til 122 years old.

“According to data compiled by the Social Security Administration:

  • A man reaching age 65 today can expect to live, on average, until age 84.3.
  • A woman turning age 65 today can expect to live, on average, until age 86.6.

And those are just averages. About one out of every four 65-year-olds today will live past age 90, and one out of 10 will live past age 95.”

Not only do you have to worry about living past 90+, you also have to worry about the rising cost of healthcare.  While Medicare may cover certain costs, there is a lot of gaps in coverage and the longer you are sick and the more medications you need, you better believe it’ll be coming out of your pocket.

What exactly does this mean for you?  It means that there is a very high probability you are not saving enough for retirement.  Even if you are regularly contributing to your employer sponsored retirement account (i.e. 401K) like a responsible little worker bee, it probably isn’t enough.

What?! You wonder incredulously.  I’m putting in $X amount of my hard earned money a year into my 401K and that’s not enough?  So what can you do?

Start saving more.  This is probably the single most important thing you can do to ensure you’ll have an adequate nest egg for retirement.  You should be saving at least 20% of your gross income.  That means if you make $100,000 a year, you should be saving $20,000 a year.

Invest your money.  The younger you are, the more important this is.  Let time and compound interest be on your side. You should be investing the yearly maximum into your 401K (or other retirement account) especially if you receive any kind of a match.  Any remaining money should go into a Roth IRA.   What if you make too much to contribute to a Roth IRA?  Not to fear, be a boss and go through the backdoor.

Don’t plan on retiring at 65 years old.  If you are around my age (in your 30’s) or younger, gone are the days of retiring at 65 years old and living off your savings stuffed in a mattress or some pension.  Maybe we can live off our kids?  Doubtful as each generation appears to be getting poorer.  What about Social Security you ask?  It’ll probably be around in some form or another, but if you think that’ll sustain you til your 100+ years old, then get ready for a major downgrade in your lifestyle.  This doesn’t mean I think we should work until we die, but I’d recommend revising your retirement age.  Even working an additional 2-3 years will help your nest egg last longer.  You could also consider working part-time.  On a side note, if you currently hate your job, you might want to consider another career.

Make more money, but DO NOT upgrade your lifestyle.  Don’t rule out the possibility of a switching jobs for higher pay, switching careers, picking up a second side job.  But do NOT under any circumstances upgrade your lifestyle!  The goal is to make more money to more adequately save, not so you can finally buy that new BMW 5 series you’ve been eyeing or those Jimmy Choo’s.

Move.  I’m talking about moving to a cheaper city, state, even country.  I know it sounds crazy to some people, but if you live in Los Angeles, California like me or some other expensive city/state combo, you can easily stretch your money 1.5X or even 2X farther just by re-locating to another city and/or state.  If you can make even a bigger move to another country, your money might go even farther.  Remember, the U.S. is one of the richest and most expensive places to live in the world.

Create other streams of income.  Whether rental income or a side business on Etsy or maybe even commercial real estate investments, look for other streams of income that can last into retirement.

This is a simple little retirement savings checkpoint created by J.P. Morgan Asset Management posted on Business Insider.  It is important to note some of the model assumptions listed on the right: pre-retirement investment return of 7%, post-retirement investment return of 5%, retirement age 65, inflation rate 2.25%, assumed annual contribution rate of 5%.  For the person making $100,000, who’s 35 years old, she should currently have $140,000 in retirement savings.  I wouldn’t panic too much if you don’t have exactly $140,000 or more in savings right now, but if you only have $70,000 in savings, its time to take a hard look at your finances and your lifestyle.

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Another thing I’d like to point out about this chart is that the factor you multiply your salary by does not increase linearly.  For the person who’s income is $100,000, when you move from age 35 to 40, the factor increases by 0.6 (from 1.4 to 2.0).  But when you move from age 40 to 45, the factor increases by 0.8, and from age 45 to 50, the factor increases by 1.0.  What this means is the older your are and the less you have saved, the harder it will be for you to retire comfortably and the more you have to save to get on track. This has to do with compound interest and why it’s so important to start saving early.   The graph below wonderfully depicts the power of compound interest.  Bill invested 3x more than Susan, but Susan actually ends up with $60,000 more at 65 years old.  How?  The power of compounding!

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Dang, J.P. Morgan makes some good visual aids.

The bottom line is, the simplest thing you can do starting today is to save more and invest it.  The younger you are, the more you benefit from this.  So login to your HR website (or call) and increase the amount you contribute to your 401K or equivalent hopefully to max it out.  The maximum contribution limit for 2015 & 2016 is $18,000.  Go to Vanguard.com or Fidelity.com and open up a Roth IRA for 2015 (you can do this til April 18, 2016, same day as tax day) and/or for 2016.  Til next time!

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