Let’s get one thing straight: Funding retirement is expensive. It’s easy to see why. Just try to imagine when you are not anymore able to work and have to draw on money that you have set aside in order to fund your living expenses once you retire. Social Security will give monthly benefits but if you are going to be retiring twenty years from now, don’t expect much from it. It won’t buy as much as what retirees today receive as the growth of the benefits will slow.
Last year, the Trustees Report for Social Security said that Social Security will be “insolvent” by 2033. The term “insolvent” in this report does not mean that Social Security will go bankrupt and stop giving benefits. Rather, this means that the agency will not be able to get enough payroll taxes to cover the benefits in its entirety within a given year.
Gail Buckner explains more fully in a Fox Business article. She wrote: “If no changes are made, it is estimated that in 2033 Social Security will have used up the extra assets it was accumulating in the Trust Fund to help cover the cost of retiring baby boomers. At that point, Social Security can only pay out in benefits what it collects via payroll tax, which has been estimated to be roughly 75% of the amount it will be obligated to pay.”
This can only mean one thing: You need to start saving for your retirement and you need to begin now! Let’s look at the reasons behind this urgency.
It’s your responsibility to fund your own retirement.
Gone are the days when employers were responsible for ensuring that their loyal employees would retire decently. Now, it’s up to you to make sure that you have money for your golden years. Since you can’t really rely entirely on Social Security to fund your retirement, it is up to you to sign up for your employer’s 401k plan and maximize your contributions. If you are eligible, opening an individual retirement account or IRA would help beef up your nest egg.
The more you wait, the less your money will work for you.
When you invest your money, you are trying to let it grow using the power of compound interest. However, compounding works its magic best when you allow time to work in your favor. You should start saving now so your money will be able to get a lot of transaction. The dollar you put towards your retirement 40 years earlier at a 7 percent rate of return will grow to become $15 when you officially retire four decades later. If you saved that amount thirty or twenty years before you retire at the same rate of return, your one dollar won’t grow as much.
At 30 years old, you should already have started setting aside funds for retirement. Ideally, you should have around 50 percent of your annual income stashed in your retirement savings. If you haven’t even begun to contribute, you should seriously think about getting started. For each year you wait, you are putting your retirement funds in danger.
As far as your home ownership is concerned, you should already have started paying for your own home. If not, you should already have started to save money for the downpayment. With a 30-year mortgage, your home would be completely yours by the time you retire. Thirty would be the ideal age for you to start getting your own home.
It’s also important that you take steps to reduce your credit card debt. If you are paying off your credit card balances each month, you are on the right track. Since this is the age when you are at the peak of your credit card use, the temptation to overspend can be very high—fight it and don’t succumb. Rather, concentrate on lowering your credit card debt and making it a point to charge only small purchases you can completely afford to pay off when the credit card statement comes.
If you have children, you should have set aside some money for their college funds so that they won’t be saddled with student loans just to get a college degree.
You should have a more serious view of retirement at this time. This means that you should already have at least a year’s worth of income in your retirement accounts at the very least. If you haven’t even begun yet, you should really push yourself to start getting your funds together. You will need to start putting away more than 10 percent of your income to your nest egg if you start this late.
As far as home ownership is concerned, you should already be paying your monthly mortgage regularly. If you are still renting, it’s really about time that you start putting together money for the downpayment. A mortgage term that’s shorter than 30 years is better so that your house becomes fully your own by the time you retire. If you are still starting to save for retirement at this time, you might have to think about extending your working years to 70 years old so you will have enough in your nest egg to fund your retirement.
You should have started to steer clear of credit card debt. If you still have a high debt load, it’s time for you to really start getting serious about it reducing it to zero. You may need to think of ways to increase your income so that you can pay down your debt. If you are already clear of consumer debt at this time then you can congratulate yourself for a job well done. Continue to keep it up.
You may already have five or ten year-old kids at this time. If you haven’t started saving for their college funds, it’s about time that you should. Crunch the numbers on how much you need to save each month using online college savings calculators.
At fifty, you should already be on track towards growing your nest egg. That means having around three to four times your current income stashed in your retirement savings account. If you don’t have this much put away, it’s time to really get serious and start ramping up the funds you have set aside for your golden years. You might also have to push your retirement a few years later.
You should also have built a significant amount of equity in your home when you got your mortgage when you were 30 years old and only have ten years or so to go before completely paying off your loan. That would mean that by the time you retire, you should already be able to call your home completely your own.
As far as consumer debt is concerned, it is expected that you have already steered clear from it. Yes, you may still have your credit cards but you’re not using it as a source of funds the way you viewed them as financing tools during emergencies when you were younger. Rather, you keep them because they are convenient and easy to use and pay off the balance completely each month.
At this time, your college savings for your kids should already be well-funded. In fact, your children may already even be in college and reaping the benefits of the money you had put away years before. With the kids already out of the house and beginning to fend for themselves, your expenses are already greatly reduced. You can use the extra funds you have to beef up your nest egg so that you can retire comfortably.
The best time to start for retirement is when you start your entry-level job. That would mean early in your twenties. However, if you didn’t start when you were 25, this does not mean that all is too late for you. You may have lost the opportunity to grow your money for a few years but you still have the chance to make up.
If you’re thinking of relying only on Social Security to fund your retirement, you have to understand that you are going to have a difficult time, especially if you’re going to be retiring twenty years from now. The benefits are going to grow much slowly and unless action is taken, Social Security will only be able to fund 75 percent of its estimated obligations, as discussed above.
Together with financing your retirement, you should also think about getting your own home and putting together money for your child’s college education. It’s very important to have your own home when you retire as this will help stretch your retirement funds. Having a college education fund for your children is also your investment into their future. Ideally, you should start doing this as soon as they are born so that they have the freedom to choose the course they want to pursue in whatever school they wish to get their degree from.
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