Can you afford to wait?
There is an old Chinese proverb that states “The best time to plant a tree was 20 year ago. The second best time is now.” Meaning, if you want success in the future, it is important to act now.
When it comes to saving for retirement, one of the biggest roadblocks to success isn’t market performance or investment selection, but simply procrastination. As we all know, life gets in the way as the hustle and bustle of everyday life consumes us. But the failure to plan for the future often results in the failure of reaching our financial goals.
According to a recent survey1, 40% of U.S. workers have saved less than $25,000 for retirement, and 29% have saved less than $10,000. In addition, 39% of workers are not currently contributing to their 401(k)’s, IRA’s or other retirement accounts. 16% of 401(k) plan participants have outstanding loans,2 11% have postponed plans to retire and 58% haven’t even calculated how much they will need in order to retire comfortably. Sadly, only 23% of pre-retirees surveyed felt “very confident” that they will have enough money for retirement.
And unfortunately, many people believe that Social Security will fund the majority of their retirement income but for most, this simply isn’t true. For the majority of middle-class Americans it is estimated that Social Security will comprise roughly 42% of their total income during retirement.3 Where will the other 58% come from? The reality is that you are responsible for the majority of your retirement income which can come from utilizing strategies like savings and investments, employer retirement plans, pensions and individual retirement accounts like IRA’s and Roth IRA’s.
Here’s some perspective of what putting off your retirement planning looks like. Let’s assume that you are 30 years old earning $30,000 per year and have nothing saved for retirement but have calculated that you will need $496,000 saved by the time you are 65 years old in order to retire. At an 8% rate of return you would need to save $240 each month which is 9.6% of your current salary in order to meet your goal at 65. If you are a more conservative investor or perhaps you earned lower than expected returns of only 4%, you would need to save $561.50 each month or 22.5% of your current salary.
Now let’s assume that you have put off retirement planning and are now 40 years old making $30,000 per year and need the same $496,000 to retire at age 65. At an 8% return you would need to save $565.50 each month which is 22.6% of your annual salary. At a more conservative 4% rate of return you would need to save $993.00 each month which is a whopping 39.7% of your current salary! Ask yourself, can you afford to put away nearly 40% of each paycheck into retirement savings?
The lesson here is to start early. Even if it is starting with small amounts, it is better than doing nothing. We recommend setting up automatic deposits into a savings or retirement plan every time you get paid so that you don’t even have to think about it. It is important to pay yourself first before paying bills and other expenses. Start with an amount that you know you are comfortable with and periodically review your plan and increase the amount you save if possible.
The first step to acting now is meeting with your financial advisor and determining where you are now, developing your retirement goals and determining whether you are on track to meet those goals or need to make some adjustments to make up for lost time. Once you and your advisor have developed a long term strategy, it is important to stick with it and not let short-term fluctuations affect long term goals.
So what if you are one of the many Americans who have put off saving for retirement and are now behind the eight ball? It’s okay! The most important thing to do is to start today.
By Michael Morey, Financial Advisor, RJFS
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Raymond James® LIFE WELL PLANNED.
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Any opinions are those of Michael Morey and not necessarily those of RJFS or Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.
The examples used are hypothetical illustrations and are not intended to reflect the actual performance of any particular security and does not represent an actual investment. Future performance cannot be guaranteed and investment yields will fluctuate with market conditions.
1 Employee Benefit Research Institute, 2019
2 Investment Company Institute
3 Social Security Administration, 2019
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