We need to save more money, people. Period.
Recently I heard about a lady in her late 60s getting ready to retire. She had worked her entire life and was getting ready start the next chapter called Retirement. Good for her, right? Everyone is going to retire someday, and she had finally reached the point in her life where she could put her feet up and relax.
The only problem: She had only saved $10,000 in her 401(k).
What!? That’s right, she had worked her entire life and had $10,000 for retirement. For those of you who like math—she could pull out $33/month using the standard 4% withdrawal rate, which should allow her money to last until she is around 90. How sad is this?
She worked her entire life and has almost nothing to show for it. One dollar a day for retirement—that just makes my stomach hurt. We live in the richest country in the world, have one of the highest standards of living in the world, and yet there are more stories out there just like this. Why?! We need to save more. Period.
We are so used to maxing out every inch of our lives with pleasure, we forget to save. Surveys have found anywhere from 47 percent to 76 percent of Americans are living paycheck to paycheck. Take 10 of your closest friends, family, colleagues, and neighbors—between five and seven of them are surviving paycheck to paycheck. Chances are, you may be part of that number as well.
Think about this for a second: If 76 percent of Americans are living paycheck-to-paycheck, how well do you think they are saving for retirement? Do you think they will have a better quality of life at retirement?
The cavalry is not coming to save you in retirement. You need to prepare for your future. How?
Enroll in a 401(k) Plan.
If you don’t have retirement assets, you won’t have a retirement. Why is this so hard? Call your HR department and enroll in your 401(k) today, if you have access to one. Most employers offer some kind of free match if you contribute to the 401(k) plan. If you are not taking advantage of this because you love shopping, and shopping, and shopping, then you are missing out on free money and you are preparing to be…poor.
Don’t Have a 401(k) at Work?
Don’t work for a company or your company doesn’t provide a 401(k)? There are many options for you self-employed peeps or awesome entrepreneurs out there.
Your options include, but are not limited to: the IRA, the ROTH IRA, and the Simplified Employee Pension (SEP)-IRA. All of these options allow you to save and invest for your future and provide taxes advantages. How nice is that?! We have all heard the phrase, you can lead a horse to water but can’t make him drink. Don’t be the horse. Start saving right now.
Now comes the fun part! Let’s look at some examples of saving your money and make it perfectly clear how easy and how awesome investing for your future can be.
Fast Forward to the Future.
According to the latest data from the U.S. Census Bureau, the average household income in the U.S. is around $53,500 a year.
Let’s say the average household invests 15 percent a year into retirement—or about $668 a month—and does so for 30 years. How much is that going to be worth at retirement? Almost $950,000! (Editor’s Note: That’s without factoring in inflation and taxes, and assuming an 8 percent average annual return. If you use a a more conservative baseline of 7 percent, it would still net about $786,000. Financial advisors generally recommend setting aside 10 to 20 percent of your annual income to invest toward your post-work life, depending on when you start.)
So… the average family in America could just about retire with a million dollars.
By the way, this scenario does not account for you getting a raise for the entire 30 years you invested. Let’s hope that’s not the case.
If you’re choosing not to pay yourself first, your budget is simply upside down. Turn it around and pay yourself 15 percent before you get to the stuff. You will notice you may not be able to afford the new car, the $400/month in dining out, and the designer bag. Pay yourself first anyway.
The reason you do this is because you are much more valuable than stuff. Still not convinced? Then understand the opportunity cost of investing only 10 percent of your income. Do that, and the above scenario (even with an average 8% annual return) leaves you with $632k at retirement—more than $300K less. You can stuff your life with stuff and retire with wealth. You’ll just have a lot less of it.
Some of you reading this are probably in your early 20s and thinking—holy crap, I am going to be rich! Some of you are later in life and thinking—oh crap, I’m screwed. Don’t give up. It is not too late to start if you still have a heart beat. (It’s just a lot easier and a lot less effort if you start sooner.)
What about us?
My wife Andrea and I both started working in our early 20s and made typical mistakes. She had a 401(k) that we didn’t even know existed for the first three years she worked. I am a firefighter and we have a 457—similar to a 401(k)—and I would stop paying into it anytime I needed more money to buy a new snowboard or hit up happy hour with friends. We didn’t truly invest because we thought there was going to be some sort of safety net later in life to catch us. Ha! We almost graduated with a Masters in Stupid from the University of This Sucks.
However, we were fortunate enough to learn sooner than later that we were stupid. That was fun. She wasn’t getting the FREE company match and I was an idiot thinking I’ll just invest more later. Remember, we were a normal couple, living paycheck-to-paycheck. And we just didn’t think about the future. Who would have known we were going to need money saved when we stopped working? Wow, we really were stupid.
Fast forward to today. We are both in our early 30s and had our annual review with our financial advisor recently. We are going to be okay. No, we are going to be beyond okay. Why? Because we delay pleasure now and live below our means. We invest like crazy. We save, save, and save some more, and it’s working. Who would have ever thought we were going to be wealthy? Not us. We hit a fork in the road, and luckily we went the right way. If we had continued on the other direction, we may have ended up with only $10K in our retirement plan. The choice is yours.
A version of this post appeared earlier on Money Peach.
September 7, 2016