The basics of retirement savings: why you need to start now
OK, let’s face this. I am in my 20’s. If you are reading my blog, you are probably in your mid-20’s as well. What’s up, retirement? Geez, why care about anything 40 years out?
Well, I’m an actuary, so I speak in terms of probability. What if I’m one of the (un)lucky few bastards that make it past 65 years old? Well, first off, I will most likely be out of jobs. And secondly, my health will not be cheap. Think more doctor visits, more ways to exercise, healthier food, higher health insurance premiums. And I may want to give something to my grandchildren if they choose to attend Harvard….
Where does the money come from?
It comes from the next few decades of working. If you plan for retirement like most people do in America, you work for 40 years, save some money, and spend that when you are no longer working. Retirement planning has two phases: saving, and spending.
To save, you put aside some money per paycheck/month/year and let it grow. Simple, right?
Let me ask you this: where do you put the money?
In the old days, people stocked up some sort of piggy banks with coins and hid it away somewhere in their homes. In some developing countries, this practice is still common. But it’s not what most of us do these days. Money hidden this way is too vulnerable.
So some people put their hard-earned money in their checking accounts. Their money is safe, and what they put in is what they get out. Let’s think about this strategy for a moment. Say you’re 25, and you work till 65, retire, and live for another 20 years. You have 40 years of saving and 20 years of spending. So for each year of spending in retirement, you have to save half the amount each year while working.
Say you have a basic retirement life and need $30,000 per year. That means each year from now till then you’ll have to save $15,000. Do you think you can do this? $15,000 a year is more than 30% of annual income for the majority of Americans. And what if you live longer? What if you want a more comfortable life when you stop working and have the world to yourself? As an actuary, I can tell that you will very likely live past 85 years old, and the annual healthcare cost alone may be in the 5 digits when you retire and no longer have healthcare coverage from your employer.
It is very hard to save a sufficient amount for retirement. And that’s why you need to start early. And that’s why I am writing about retirement right now.
More coming soon.
-Richard (Hiep Tran)