Not Enough Money to Retire

enough money to retireI read an article today in The ChicagoTribune regarding the lack of savings for those nearing retirement. (After reading about our horrible savings rate, this shouldn’t be a surprise.) Overall, 47% of baby boomers do not have enough money to cover basic necessities which include food, utilities, and health care while in retirement.

Younger savers, Gen X’ers, don’t fare much better: 44.5% percent of people in this age group will run out of money in retirement. While this may come to a surprise to many of my readers, not having enough money to retire does not surprise me.

Not Saving = Not Enough Money to Retire

Many people put off saving for retirement in their 20’s and 30’s rationalizing that retirement is decades away. By the time they begin saving, usually their late 40’s, they are playing catch up and must take unnecessary risks just to get close to a decent amount saved. What people need to realize is that time is your friend and his best friend, compound interest, is your friend as well.

Look at these facts: John and Sarah start working when they finish college. Both are 25. Sarah starts saving for retirement right away, investing $5,000/year. She saves this same amount each year for the next 10 years until she reaches 35. She does not invest any more money. Each year, her money returns 10%. When she retires at age 65, she has a little over $863,000.

John on the other hand, decides not to start saving for retirement until he is 35 years old. He then begins saving $5,000/year, each year for 25 years until he is 60. His money also returns 10%. When he retires at age 65, he has just over $496,000.

Let’s look at this a little closer. Sarah invested a total of $50,000 ($5,000/yr x 10 yrs). John invested a total of $125,000 ($5,000/yr  x 25 yrs). In the end, Sarah has roughly $367,000 more in her retirement account. I’ll give you a minute to digest all that……OK, that should be good.

I hope you can see why investing for retirement as early as possible is key. Sarah invested $75,000 LESS than John and ended up with $367,000 MORE than John. All because of time and compound interest. If you are young, start saving for retirement now! If you are older, I hope this motivates you to start saving more today. Every day you wait means that you have to invest more than you needed to invest yesterday. Also if you are older and you have younger children, encourage them to start investing for retirement now. Show them this example to hammer the point home.

Additional Thoughts

A few more points:

  • 10% return used in the example is a little aggressive, but the basic formula holds true.
  • Additionally, whatever you think you need for retirement, you need more. Here is why: Unless changes are made, Social Security benefits will have to be reduced and/or delayed (no benefit payments until 70 or later) in order to continue to pay out to recipients. Also, taxes may (and most likely will) rise. With so many people not saving enough money to retire, there is a good chance taxes will need to be increased to help cover costs for many of these people. Please don’t take this as your “out” to not save. No rise in taxes is guaranteed. Wouldn’t you rather be comfortable with your own money than have to rely on the government? I love this country, but name me one program that the government runs efficiently.
  • Finally, when most think about the amount of money they need in retirement, they think in terms of today’s dollars. They don’t take into account inflation or even hidden inflation. Both of these will force you to need more money than you think in retirement.

All of these points apply to you whether you are thinking about retiring early or not. In fact, if you haven’t saved anything yet for retirement, I would encourage you to click on the link in the last sentence and start following the advice so that you have money to retire.

Final Thoughts

Without saving for retirement, you will not have enough money to retire. It is a fact. The sooner you start saving, the greater your chances that you will have enough money to retire. Money adds so much stress to our lives. By knowing we have enough money to retire takes a huge weight off of our shoulders.

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