You know you should get going on saving for retirement, but you think “there’s time.” Well, maybe. But that depends on what kind of life you want to live when you retire. Want to take that trip to Fiji? Or are you good just doing crossword puzzles and living at your grown kid’s house? The answers are yours, and yours alone, but the point is that you need to start thinking about them now. Here’s a start:
1. When will I retire?
The average retirement age is sixty-seven, so you likely have a ways to go, but different strokes for different folks. Obviously, the longer you work, the more you can save and the less time you have in retirement. A lot of us would like to retire ASAP, and if you win the lotto or strike it big, that can happen. But for now, don’t be unrealistic about the age at which you can realistically retire. Remember, you need to account for inflation. Let’s assume a 3% rate of inflation. We need to account for inflation because what you really care about is the value your money will have in retirement, not necessarily right now. What will our money buy us when we need it? One million bucks today will likely buy half as much in twenty-five years. Ouch. You need to account for that when planning for your golden years so you don’t show up to the retirement party short-changed. Even more reason to get started NOW!
2. When should I start saving for retirement?
YESTERDAY. I’ll just give you a little example. A twenty-year-old woman who puts a one-time $5,000 investment into a retirement account will have $160,000 by the time she retires. However, if she had waited until she was forty years old to invest the same amount, she would have only $40,000 by the time she retires. Let’s say, however, that this woman puts in $5,000 per year starting at age twenty. By the time she retires she will have . . . almost $2 million! Compound interest is your friend. Use it.
3. Which comes first: slaying my debt or saving for retirement?
Tackle your debt first, then retirement. While you might have the best intentions by investing for retirement and paying down debt at the same time, those good intentions could come back to bite you on your old bum. It’s like ordering a Diet Coke with your cheeseburger and fries; you feel like you’re making a healthy choice by ordering the slightly less sugary soda, but who are you kidding? You’re only lying to yourself by ignoring your bigger problem. The same goes when saving for retirement. There is no point in maxing out your retirement contributions if your credit cards are maxed out. Tackle those high interest rate loan payments first and then invest for retirement. If you are carrying debt at a lower interest rate, say student loans, you can likely pick away at both paying those off and saving for retirement—shrinking your debt and growing your money at the same time—but remember that, in doing this, you take one step back for every two steps forward.