Installment 5- Retirement: Objects are Closer than They Appear

April 30, 2017

 

When you’re at the ages 20-35, retirement may seem like a lifetime away, especially when you have student loans knocking at your door…window, bathroom stall- you get the picture. Nevertheless, the show must go on, and time waits for no one. Now, if clearing away your debt is your primary focus at this point, then there is no harm in that. I am a huge fan of bulldozing, meaning putting around 90% of my efforts on one area, until the goal has been attained. So, if you would like to continue with knocking out your debt before starting your retirement plan, then I will not discourage you; though, it is nice to have an idea on what you can expect. Just be aware the longer you wait, the more you will need to save in a shorter amount of time. This discussion is not for the faint of heart. When you decide to crunch your numbers to calculate how much you need to retire, you may get some sticker shock at the large number. With that being said, you’ve been warned and please proceed with caution.

 

I’ve looked at a few retirement calculators and the one I feel is the easiest to follow, with realistic estimates, is on CNN Money. This view will show you side by side, how much you will need to retire, and how much you’re on track to have. It will also provide you how much that is in today’s dollars, and how much that will be in future dollars, due to inflation. For example, your dollar today will lose value over time, and could be worth $0.90 in twenty years. Therefore, in order to have the same value of the dollar today, that means you’ll need a $1.10 in twenty years. In other words, you will need more money in the future, to maintain the same value of money you have today. Remember how your grandparents used to say something like “Back in my day, I could get 5 pieces of candy for a penny.” Well, that’s because that same penny 50 years ago, is now worth around a dime in today’s economy, ten times the amount. What used to cost a penny, now costs a dime.

 

Please keep in mind, that this is simply an estimate for educational purposes. When you’re planning out retirement, it would be best to discuss it with a financial advisor. However, for the DIY and estimate route, this tool will satisfy your needs. You will notice that most quick retirement calculators do not take in to account your expenses, only your income, time, percentage of savings etc. The extent quick calculators may ask is if you plan on living more modestly, about the same or more extravagantly, than your current lifestyle.

 

Most retirement calculators also add in social security into the equation. Millennials’ situation will be different to say the least, when it comes time for us to retire. Social Security is a government construct that will not cease to exist, but will look drastically different compared to our parents and grandparents. From what I’ve read and researched, there is no crystal ball that tells us where Social Security will be in our future. With that in mind, we have to actively prepare for our retirement a lot more than our predecessors, and cannot depend on social security to carry us through our golden years alone. Begin investing in a 401k and/or IRA as soon as you’re able. If your employer provides a 401k match, then take it! Do not leave free money on the table. The more money we invest now, then the more potential growth we can cash in during our retirement.

 

401(k), IRA, Roth IRA, these are terms you may have heard before but never got the break down on what they are and their differences. Allow me to give you a crash course. 401(k) is an employer provided retirement account. If you work for a non-profit company, then you may see a 403(b). These plans allow you to invest a piece of your paycheck before taxes to your retirement. It’s an easy way to get started, and if you don’t see the money hit your direct deposit, then it’s harder to miss it (at least after the first few months).

 

IRA stands for Individual Retirement Account, and it is exactly how it sounds. This is money that you can deposit on your own without your employer.

 

Now the word “Roth” in front of any retirement account to me is like gold. Why? Because Roth means after tax, meaning that when you’re at retirement age, you won’t have to worry about taxing the money you withdraw, because it’s already been taxed. What you see, is literally what you get. However, that does mean you will feel the hit while you are depositing those funds, because you will be taxed right away. I’d rather pay a little as I go along, then have a large tax bill when I’m trying to enjoy my retirement. That’s just my preference.

 

This piece is clearly just a sample on what you’ll need to consider in retirement. However, in our twenties and early thirties, this sample may be able to suffice, and get the ball rolling. Every retirement account has limits as to how much you can deposit a year, based on your income. It is highly recommended that when you’re closer to nailing down the next 30-40 years, that you do a deeper dive with a professional adviser.

 

As always enjoy the rest of your day, and remember a debt sentence doesn’t have to be a life sentence.

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