Don’t Wait to Start Saving for Retirement
The author of this blog, Ben B. Baum, was an intern at AIER who studies economics at Bard College. He is currently planning on pursuing a master’s degree in public policy and a doctorate in economics.
When I started my internship at AIER, I knew as much about saving for retirement as I did about quantum physics. In the back of my mind I knew it was important, but I knew nothing. My research at AIER has taught me some simple things that everyone, especially young people like me, should know about retirement.
Investing for retirement doesn’t have to be rocket science. In this piece I would like to offer a few things that every young person should know:
- Employer-sponsored pensions are a thing of the past
- Social Security alone is not going to provide a comfortable retirement
- Starting early is key
- The Internet is a valuable resource
Don’t expect your employer to offer a pension plan:
The world of retirement has changed drastically. We no longer live in a world where 40-year careers with the same institution exist. Armed with the Internet and our millennial sensibilities, our generation is facing a more fluid work environment than even that of our parents. Just as how we work has changed, how we save for retirement has changed as well. The pensions that our parents and grandparents depended on are largely a thing of the past. A study conducted by the U.S. Bureau of Labor Statistics found that only 18 percent of all private industry workers had a defined benefit plan, down from 35 percent in 1990.
What this means is that individuals have to fend for themselves with self-directed 401(k)-style plans. Without the comfort of a company pension, our financial futures are our responsibility.
Social Security is not a free lunch:
As my fellow intern Forrest Davis-Hollander noted in his recent blog post “Social Security: Straightening out Misconceptions,” only 9 percent of Americans believe they have a solid understanding of how Social Security works. I’ll admit that I was part of the 91 percent.
What is most important for young people to know is that Social Security was never meant to finance the whole of retirement. The U.S. Social Security Administration estimates that Social Security will only replace 42 percent of the average earner’s wages. This is only about half of what most will need for retirement as most financial planners suggest a replacement rate on the order of 80 percent to maintain their standard of living in retirement. Social Security is simply not set up to be your primary source of income in retirement.
It’s hard to think about retirement, but that doesn’t mean you shouldn’t:
Retirement is hard to think about, especially for young people. It is just so far off. No one wants to think about getting older. This makes it easy to put off. Through high school and college we have all gotten really good at putting things off. We start research papers the day before they are due, stay out too late, and leave dishes in the sink. In sum, we often underestimate the future cost of our actions today. While procrastination was manageable in high school, it can be a real problem in investing for retirement. To put a more positive spin on this, starting earlier can be hugely profitable. This is all because of compound interest which Einstein once called, “the eighth wonder of the world.”
It is the key to building wealth over time, allowing you to not only make money off what you deposit, but on what those deposits earn as well. Over long periods of time, compound interest can have a huge impact. As young investors, we are particularly well positioned to take advantage of this.
Here’s how it works:
Let’s imagine that I can afford to save $100 a month for retirement. If all I do is put that $100 in my mattress for the next 40 years I would have $48,000 when I retired. But if I invest the same $100 and get an 8 percent annual return, I would have almost $350,000 in 40 years! If I wait just 10 years to start saving and only give my money 30 years to grow, I would have less than $150,000. As you can see, waiting just 10 years cost me about $200,000!
The beauty of compound interest is that it is wholly within your control. You don’t need an advanced degree in finance to take advantage of it. All you have to do is start now.
Plan for your future from the comfort of your living room:
As young people, we have a huge advantage that our parents did not: the Internet. There are a host of online tools that can assist you in taking control of your financial future. There are Websites like Mint.com that can help you budget. There are online brokers like E*Trade or RobinHood that allow you to invest in the stock market. There are even online investment advisors or robo-advisors like Wealthfront and Betterment that will invest your money for you.
These services offer some key things:
- Low or non-existent minimum balances: You can start by investing with what’s in your pocket right now.
- Unintimidating language: You don’t need a translator or a Ph.D.
- Analytics to help you visualize your finances
- Low fees: You won’t have to pay that much for financial advice
- Mobile functionality: You can plan your retirement without leaving your home
Thinking about investing for retirement is hard but important. No one wants to think about getting older. Given the opportunity, I’d stay 21 for many years to come. But the simple truth is that continuing to live means I will get older, and will likely retire.
If you take only one thing away from this article, take this: Your financial future is worth thinking about. I know that it sounds daunting, but it doesn’t have to be. Starting early, saving wisely, and taking advantage of tools available on the Internet are all manageable ways of taking control.
It begins with a single step.
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