Why do you think it’s so hard for some people to save for retirement?
There are many reasons. Some individuals are barely able to live on their after-tax income. They spend every dollar on food, shelter, transportation and other necessities. Given a choice, these individuals will almost by necessity delay saving for retirement, which may be 20, 30 or 40 years away. Satisfying immediate needs is more important than saving for something in the distant future.
Many people have hedonistic tendencies. If they have some excess funds, why not use them on a vacation, unnecessary new clothing, a nice car, an expensive concert or meal or other items that provide a short-term kick? CNBC personality Jim Cramer said that “Gen Z is broke because they are buying too many $14 margaritas.” Sometimes that short-term boost is needed just to keep going and enjoy life. But if you always give in to those temptations, you will find it hard to save much for retirement.
Many individuals are in debt. If you pay an interest rate exceeding 12% per year on your loans, you should pay off your loans before you start saving.
Is there anything the government should be doing to make it easier for people to save for retirement?
The government has already set up a plethora of retirement savings plans: IRAs, 401(k)s, 403Bs, 457 plans, 529 plans (which can now be rolled over into a Roth IRA) and more. The Secure 2.0 Act of 2022 requires that new 401K and 403B plans have an automatic enrollment requirement, which means that individuals must go out of their way to opt out of saving.
This makes it easier to save for retirement because, previously, individuals had to go out of their way to opt into the plan. The default option will now be that you are enrolled. Studies have shown that more people will save money with the automatic opt-in requirement.
If you delay investing in your 401K or 403B plan, the government will let you catch up for the years you missed. Take advantage of this provision if it applies to you. So, the government has already done a lot to make it easier for people to save for retirement.
Putting aside the fact that some people don’t earn enough, why do some seem to have no trouble saving for retirement, but it’s more challenging for others?
For some individuals, saving is a necessity. They save first and spend what remains. Individuals who automatically save some of their paycheck before they cash that check will, by default, save. If you wait to save what remains after you are done spending, you will find it less likely you will have money left to save.
What advice would you give to younger people in their 20s who may still need to start seriously saving for retirement?
Start saving early. If beginning at age 20, you save $10,000 per year for 50 years, earning 6% per year on your savings and investments, then when you retire, you will have $2.90 million (sounds like a lot, but 50 years from now, it won’t be). If, instead, you delay the start of your savings program for ten years, you will have $1.55 million when you retire. If you delay for twenty years and begin saving at the age of 40, then you will have only $790,582. The differences in your retirement savings are significant. So start early!
When you are younger, in your 20s, 30s and 40s, invest only (or almost only) in stocks. There has never been a 30-year period in the U.S. when stocks didn’t outperform bonds. Take the risk that this will happen again in the next 30 years, just as it has happened in every 30-year period in our history. American companies will always find a way to make money. Invest in their stocks; there is a good chance you’ll earn more than 6% per year. Diversify!
Invest in tax-free accounts like a Roth IRA when you are in a low tax bracket (certainly under 20% is low), and save in tax-deferred accounts like a regular IRA or a 401K if you are in a high tax bracket (certainly over 30% is high). Letting your money grow at an after-tax rate will provide you with more money to live on when you retire.
Minimize investing expenses. When buying ETFs and/or mutual funds, consider their expense ratios carefully. There are index funds with expense ratios of 0.00% (yes, zero!) to 0.05%. But many actively managed funds have expense ratios exceeding 2%. It is much more difficult to accumulate financial wealth when you give up 2% per year to the fund manager yearly. Substantial evidence shows that funds with high expense ratios significantly underperform relative to low-cost index funds.
You will find it easier to save if you live in a low-cost-of-living location with low housing costs and low taxes than if you live in a high-cost-of-living location. Try to give up unnecessary expenses; e.g., giving up a daily latte will produce over $1000 in money to save. The same savings can occur if you reduce your alcohol consumption.
Become financially literate. Take the time to learn a little finance, accounting and economics. A good financial education will help you understand what saving for retirement is all about.
If you’re still looking for inspiration or insight into saving for retirement, here’s the good news. There is no shortage of resources available for you to contact which can provide support. Here are some:
- American Retirement Association: On this nonprofit’s website, you will find thought-provoking articles facing today’s retirees.
- Let’s Make a Plan: It’s a nonprofit website designed to help match people with certified financial planners.
- MyMoney.gov: It’s a clearinghouse of federally-funded research and reports about Americans’ finances. Go to “life events,” where you’ll find a lot of booklets on retirement.
- Retirement Planning: This is a saving-for-retirement resource page offered by the Association of International Certified Professional Accountants. If anyone can teach you how to save for retirement, it’s probably these professionals.
- Retirement Savings Plans: The University of Michigan has many links and information on saving for retirement.
- Social Security in retirement web page: This is a web page on the Social Security website. The entire website may be helpful, but this is a good place to start.
- “Taking the Mystery Out of Retirement Planning:” A helpful e-book guide from the Department of Labor. It offers retirement budgeting worksheets, among other helpful information.
- The Consumer Financial Protection Bureau: A federal agency with many excellent resources for helping Americans with their finances. Not surprisingly, they have a “planning for retirement” web page.
- “Top 10 Ways to Prepare for Retirement:” A Department of Labor brochure offering 10 ways to get ready to retire, essentially acting as a road map for retiring.
- Type of Retirement Plans: The Internal Revenue Service offers a long list of the types of retirement plans and how they affect your taxes.
- USA.gov: A federal web portal designed to give virtually any information Americans seek. Their “retirement” section offers a lot of suggestions on how to better save for retirement.
As originally published at www.moneygeek.com