I love this statement. There is so much truth in it.
Retirement is a financial state. So, what does it mean?
Pension Plans Are Going Away
The days of staying with one company your whole life, getting a gold watch and a pension for the time you spent there and maybe some medical benefits for the rest of your life are over. Sure, there may be some exceptions but overall, that is the way it is now.
Many companies have quit offering a pension plan. Many more have stopped contributing to a 401k in the form of matching funds. Either that or they have reduced them considerable. Here is an example. I worked for a fortune 500 company for over 20 years. When I started, I was offered a pension however, at about the 4 ½ year mark, they canceled the pension plan and offered a Retirement Contribution Plan where they would contribute money to an account and if I retired from the company, I would have that money. Later, that plan was canceled and combined with my 401k plan. Initially, the 401k plan matched 6% of the money that I put in. More recently, that also changed to where I would get a profit sharing amount added to my 401k that ranged from zero to 6%. Typically, we only ever saw 2-3 percent.
Now I am on disability so they do not contribute anything.
That’s how I see things going for just about everyone in the future. That is also how I came to the conclusion that retirement is a financial state.
Save Often, Save Much
For anyone considering retirement, you need to basically save enough money to live on for the rest of your life. I think the best way to do that is to have enough in savings so that you can live off the interest from that money. This way, you will never run out of money. Who knows if Social Security will be available in the future? As many times as we hear on the news how it is going bankrupt or they will run out of money by a certain date, I have no expectations anymore. I’d rather make sure there is enough there to live on – period.
I cannot stress enough to start saving now. It does not matter if you are 20 or 50 years old.
Here is a basic plan to use which I wish I had done many years ago. The older you get, the harder it is to implement this idea.
Step 1. Save 10% of all money you receive. I tried to wrap my head around it this way. What can I buy for $0.90 instead of $1.00? What can I buy for $9.00 instead of $10.00? What can I buy for $90.00 instead of $100.00?
Step 2. Keep doing Step 1.
To show the effects of waiting, I am including three charts showing what savings looks like over a period of time.
The first chart is for someone who simply saves $5000.00 per year starting at age 21 until they are 65. It also assumes a modest 6% interest on that money using simple interest. That is less than $100.00 per week.
Next, we will see the effects of waiting just five years before you begin to save any money. We will use the same parameters. $5000.00 per year starting at age 26 and continuing until age 65.
Finally, we will look at the results if you do not start saving until the age of 31.
Sorry the images are so small. Click on the image to get a larger view.
As you can see, using simple interest, you are losing roughly half of the possible savings by simply waiting 10 years to start. That certainly changes the lifestyle you would live when you are older.
How Much is Enough?
For those that think that $590,000.00 is a lot of money (which it is), if you took $75,000.00 out every year to live on, that money would only last approximately eight years before it was gone. Living on just the interest on $590,000.00 at 6% per year and not contributing anything else after age 65 would give you approximately $35,400.00 per year to live on.
Having $1,127,540.00 in savings would give you $67,652.00 to live on each year if you continued to receive 6% on that money. You would also never run out. Keep in mind that you would have to pay taxes on the interest unless you put the money in a Roth IRA. We can discuss Roth IRA’s in another post.
How hard is it to save about $100.00 per week? That or course depends on what your income and expenses are. One thing is for sure – if you are sending credit card companies $400.00 per month or more, then eliminating credit cards would give you that money without changing any of your other spending. Is it worth it to you?
What ways do you have of saving money for a future that is really far away?