Early retirement planning yields big results
If you’re wondering when’s the right time to start saving for retirement, the answer is now. The reasons for putting it off run the gamut from overconfidence to abject fear. Some executives with top-tier benefit packages often feel their retirement plans can wait. The comfort of a stable career doesn’t push them to worry. Others may not have enough money each month to put towards retirement. Or they put off saving until they can match the recommended amount given their age. But these are all terrible excuses. Even a little bit of savings is better than none.
While some common financial tips can actually hurt your retirement, there’s no doubt that starting early is a rock-solid financial strategy. After all, if you want to ride the market’s ups and downs or overcome investment mistakes, you’ll need the extra time to make up the losses. Don’t procrastinate because of job security or fear. Here are some other reasons why you’ll want to start planning for retirement right now.
Funerals are Expensive
Funerals and final arrangements are a big part of saving for retirement. The median cost for a funeral is almost $8,000. And that’s just the cost of a basic funeral service, viewing, and burial. That number doesn’t reflect money for monuments, flowers, and obituaries. It’s easy to disregard these funeral costs when you’re feeling healthy and successful. Right now, these high costs seem distant and hypothetical. But imagine if you just received an $8,000 invoice. Now, add to that scenario, the fact that you’re stressed, grieving, and sleep-deprived. That is the reality of your family will face if you pass on without buttoning up our end-of-life plans.
Finding an affordable insurance plan that fits your needs is easy. Just research the best final expense companies (a.k.a., “burial insurance companies”) and compare costs and benefits. The earlier you get in, the less expensive it will be. And you’ll have less worry knowing there’s an end-of-life plan that kicks in as soon as you’re gone.
Social Security May Be Insolvent
Don’t plan on living off your Social Security benefits when you retire. The latest report by the Social Security and Medicare Trustees estimates that funds for Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI) will be depleted by 2035. That’s only 15 years away. It’s a sobering thought and a powerful incentive to re-evaluate your annual contributions to your 401K or start an IRA. The OASDI pays benefits for you, your survivors, and any disabled person in your family. So, even if you don’t make it to retirement yourself, these cuts will affect your spouse and/or children. They could receive fewer OASDI benefits in the future.
When planning your retirement, consider the cost of living and tax increases. Each year, the Board of Trustees adjusts the maximum taxable earnings to reflect real wage growth. In 2019, the taxable earnings base was $132,900. In 2020 it will be $137,700 — a 3.6% increase. As a result, around 12 million high-earning workers will see a bigger tax bill. Start saving now to offset rising costs and the lack of Social Security funding in the future.
Compounding Interest Takes Getting in Early
Why start saving for retirement now? Because you can pay less and still get more when you retire. That’s because of the power of compounding interest. When you save for retirement, you reinvest the interest you earn back into your principal amount. That reinvestment accelerates the growth of your balance over time. In short, the more you save, the more you can save. But you need to get in early to enjoy the compounding effect. Here’s an example.
Let’s say Investor X and Investor Y began saving for retirement at different times. They both started with a zero balance, and they both invested the same amount each year (e.g., $10,000). But while Investor X begins saving at age 40, Investor Y begins at 30. Here is the retirement savings balance of both accounts at age 65 at an 8 percent interest compounded each year:
- Investor X: $789,544
- Investor Y: $1,861,021
What a difference ten years makes. But the advantages don’t stop there. To save the same amount as Investor X (i.e., $789,544), Investor Y only needs to save roughly $4,000 each year. So, investor Y would pay $6,000 less each year than Investor X and still save the same amount by age 65. Saving early means you pay less and save more. Take advantage of tax deferral payments that investment vehicles like IRAs offer. These deferrals let you increase your monthly/yearly contributions and compounding interest yields.
You’ll Live Longer and Need More Healthcare
Although the average life expectancy is trending downwards in the U.S., the overall trend is still up from generation to generation. The current life expectancy of someone born in 2017 is 78.6 years. The upside is that you’ll likely live longer than your parents and grandparents. That’s great news for you and your family, but longevity also means you’ll need more retirement funds.
There’s a real possibility that many retirees will outlive their savings. One reason for this is medical costs. The older we get the more we spend on medications, doctor visits, and procedures. In fact, we pay out around one-third of our lifetime medical expenditures when we’re middle-aged and nearly half when we’re seniors. And because women live longer than men, they also pay one third more in lifetime medical costs. When you add more healthcare to the steep rise in U.S. healthcare costs, the outlook for retirement funds is grim. The bottom line: you’ll likely live longer, but your healthcare costs are going to eat into your monthly budget significantly. Start saving for retirement now to offset healthcare costs.
Social, political, and financial changes are making it difficult for the average person to predict the best strategies for retirement saving. Company pensions are a thing of the past, savings estimates keep increasing, and social safety nets are struggling. It’s likely that Social Security won’t be enough when you retire. But don’t feel like all is lost. Even if you’re just getting started, it’s never too late to save. Work with a financial professional. The shorter the time you have, the more accurate you need to be.
Written by: Hilary Thompson
Hilary is a freelance writer, small business owner, and travel junkie. With a background in content strategy, journalism, and business management, she loves to explore solutions for success, in all areas: health, business, parenting, life.