Back in January, 1980, when I started my first job out of college, I was pretty naïve. I had no idea how to advance my career, navigate office politics, or even dress well. I can laugh now at how clueless I was back then and marvel that somehow things worked out and I enjoyed a reasonably successful career in spite of it.
But I made one decision that turned out to be one of the smartest things I have done in my life. It set me on the course to be where I am today.
After years of struggling to get by as a college student, living as cheaply as possible with just a few extra bucks here and there, now suddenly I found myself with a regular paycheck coming in!
That decision? When I started my first job, I signed up to have 10% of my paycheck withheld for my retirement savings.
The fact that I have saved at least 10% throughout my working career has allowed me to retire at 56, and look forward to three decades or more of happy, fulfilling, and relatively stress-free retirement. (I actually saved quite a bit more, but more on that later.)
From the beginning of my working career, my lifestyle has been calibrated based on 90% of what I actually earned.
Whenever I bought a house or a car or made any other spending decision that made me stop and think, “Can I afford this?” I made my decision based upon that 90%. I never even thought of the 10% that I was saving for retirement. I never saw it, so I never missed it.
Fast-forward to my last day of work, December 31, 2013. As I was walking around my office saying good-bye to my co-workers (the few who were at work on December 31), I spoke with one young lady in her mid-20s, who was about 2½ years out of college.
She said, “I hope I’m able to retire early like you are some day!”
I asked her, “Are you saving for your retirement?”
She paused and replied, “Well… I’m saving up for a down payment on a house.”
That’s a laudable goal, and I’m glad she’s saving money for something. Perhaps this young lady plans to start saving for retirement after she saves enough for her down payment. But then, there will be furniture, kitchen appliances, curtains, décor, and all kinds of other things to buy. Plus, when people buy houses, they tend to choose a house that’s at the upper limit of what they can afford at that point in time. They figure that raises in subsequent years will effectively reduce the percentage of their budget that’s going towards their house payment.
Then there will be a new car to buy and vacations to take. If she has children in the future, that will represent a significant additional expenditure for at least a couple more decades.
For my former co-worker, and for many others like her, I suspect that saving for retirement is always something that can be put off until next year. For many 20-somethings, and even some 30-somethings, retirement still seems so far off that they think they can safely defer saving for it until later.
Recently, I read some statistics that stopped me dead in my tracks.
The average 50-year-old in the United States has saved $43,797 for retirement. 36% of Americans have saved nothing for retirement at all.
Why is this? Why are so many people reluctant to plan for their retirement?
Many people have a hard time thinking of their retirement in positive terms.
The word “retirement” carries baggage for many people. To some, “retirement” screams “has-been.” Many people visualize retirement only as those sad last few years of life, when your health deteriorates, you have little money, nothing to do, and you ultimately move into an assisted living or nursing home and die. Most of the people you see are doctors and caregivers, and your primary mode of transportation is a motorized wheelchair. People of this mindset would rather not think about their retirement at all.
Considering how youth-oriented our culture is, envisioning ourselves as older people is just not something many people want to even think about, let alone look forward to. It’s as if thinking about retirement and planning for it is an admission that we won’t be young forever, and if we postpone thinking about it and planning for it we can postpone its arrival or avoid it altogether. Intellectually, we know that’s ridiculous, of course, but subconscious emotion can be a powerful thing.
The concept of “Retirement” has changed dramatically over the past few decades, and so has saving for it.
When Social Security was created in 1935 the average life expectancy (in the U.S.) was 62 years old. Social Security payments started at age 65, so over half of the population didn’t live long enough to start receiving Social Security. Even those who did probably lived only a few more years. Retirement during those years was short, relatively speaking. Many people worked until they died or until they were physically unable to continue working. It’s no wonder most people didn’t bother to save for retirement.
Today, average life expectancy (in the U.S.) is 79. It’s much more common for people to live well into their 80s and 90s. That’s two or three decades of retirement.
This is great news. But these additional active years come with a price tag, and we need to assume responsibility for it.
Speaking of Social Security, the average monthly Social Security check today is $1269. Would you want to try to live on that? Social Security was never intended to be a comprehensive retirement planning scheme. It was created during the Great Depression to keep seniors from starving or becoming homeless. It provides for subsistence living, nothing more.
Another dramatic change in the retirement landscape is the gradual demise of the pension plan. Used to be, people would go to work for one company and stay with that company throughout their career. After putting in so many years, they would be rewarded with a monthly pension payment for the rest of their lives.
Now, and for the past few decades, it’s much less common for work for the same employer throughout their working years. They may not stay with one company long enough to qualify for a pension, or if they do, it will be small. This has been the result of a more mobile workforce, as well as factory closings and downsizing. Most private enterprises are phasing out their pension plans or have eliminated them entirely. The federal and state governments are among the few employers who still offer their employees decent pension plans.
The responsibility falls on you to save for your retirement.
If you start saving in your 20s, you can save and invest 10% of your earnings and have a reasonably good chance of having enough savings with which to retire at 65.
But there’s another reason why procrastinating can be a costly mistake.
The money you save in your 20s is the most powerful money you’ll ever save, because it will have 35-40 years to grow and compound.
Plus, you will be establishing the habit of saving, and your lifestyle choices will be based on 90% of what you earn.
If you start saving in your 30s, you’ll need to aim for saving 15% of your earnings. Not only do you have to make up ground for the money you didn’t save in your 20s, but you will also have lost the earnings on those investments.
If you wait to start saving in your 40s, you’ll need to find some way to save 20% or more of your money. That’s a steep mountain to climb if you’ve been accustomed to spending everything you make, but it can be done!
I was able to retire just shy of turning 57 – or about eight years earlier than the assumed retirement age of 65. How did I do this?
As I mentioned earlier, I started my career saving 10%. But as time went on, I increased the amount – first to 12%, then later to 15%. By the time I was in my 50s, I was saving at least 20%. Whenever I got a nice raise, I allocated some of that raise to increasing the percentage that was being withheld for my retirement. Retiring early has always been a goal of mine.
That’s why my early decision to start saving 10% for my retirement is one of the smartest decisions I’ve ever made.
That one choice literally means that the next 30 or so years of my life will be more comfortable, more secure, and filled with possibility.
That’s why it’s so important for you to start saving now, if you haven’t already, or to step up your rate of saving if you feel you need to catch up.
There are a few other simple things you should be thinking about and doing in the various decades of your working career.
My new eBook, Retirement Planning by the Decade, is designed to suggest things you can do throughout your life to plan for your retirement. Some of the suggestions have to do with saving, but most of them have to do with envisioning the kind of retirement you want to have so you can plan accordingly.
You can download a copy right now, for free. Just enter your name and email address in box below and click Submit.
If you find it useful, please do your friends (especially those in their 20s and 30s) a favor and forward this post to them.
Getting your saving on track is one of the smartest choices you can make for your future.
© 2014 by Dave Hughes. All rights reserved.