Why You Should Plan For Retirement Early
Why You Should Plan For Retirement Early
Why You Should Plan For Retirement Early
Planning for retirement is a critical issue that will have a dramatic impact on our lives in the years to come. If you're like me, retirement planning is something that you put off longer than you should have and, as a result, are now playing catch-up. When we're young, we always seem to have more important priorities and as such, planning for our golden years takes a back seat.
Compounding Interest
Investing earlier in life will have a significant impact on our retirement accounts due to the exponential effects of compounding interest. As a result, a small amount invested early will grow to a much larger amount over time. Let's look at an example:
Let's say that at age 25, a person makes $30,000 per year. Her income increases 3% per year on average and she works until age 65. Historically, the stock market has averaged an 8-10% return over time, so let's be conservative and assume that her retirement account will average an 8% return. For the sake of simplicity, we're not going to factor in any other investments or employer matching funds.
If our investor starts contributing 6% of her income at age 35, she will have a little over $400,000 in her retirement account when she retires. However, if she starts contributing the same 6% at age 25, she will have almost $725,000 when she retires. That's over $320,000 more money in her retirement account when she only contributed about $20,000 more. The difference is because she started earlier and gained the benefits of compounding interest.
Social Security
It's absolutely necessary to plan as best we can because the sad truth is that most of us will not be able to rely on Social Security. Social Security was intended to be a supplement but unfortunately many depend on it as a primary source of income because they did not adequately plan for their retirement. This is not to say that many of these folks didn't do the best they could, but due to unfortunate events in their lives or just plain apathy, the result is a large group of people that cannot survive without it.
It's important for those of us who are not yet retired to formulate our retirement plans without including Social Security. This is because despite what is reported in the media, Social Security is insolvent today. This is not a political perspective, it is a fact. To understand why, we must understand how Social Security works.
In a nutshell, Social Security is essentially a ponzi scheme. Today's workers pay taxes which are used to pay today's retirees. When the program was started, there were 40 workers for every retiree, so the program worked. In fact, for many years, Social Security ran large surpluses and amassed a sizeable "trust fund" (more on that in a minute). The problem is that today, there are only 3 workers for every retiree and by 2030, projections are that there will only be 2 workers for every retiree, which is obviously not sustainable unless you and your best friend want to start your own "adopt a retiree" program.
As of last year, the program no longer runs surpluses and will have to dip into that trust fund every year going forward. There is approximately $2.5 Trillion in the trust fund, so what you hear from the Government and media is that the fund will keep the program solvent through 2037. Here's the problem. There is no money in the trust fund.
By law, surpluses in Social Security have to be used to purchase U.S. Treasuries, so in essence, the Government is loaning the money to itself. Yes, it's true that Social Security has $2.5 Trillion in treasury notes that it can redeem in order to cover its shortfalls, but there's no bank account or vault at Fort Know with $2.5 Trillion in it. For decades, when the Government has received the surplus money from Social Security, they did what they always do. They spent it. It's gone. For the Fed to pay back the SSA, they will have to borrow more money (on top of the $14 Trillion we already owe). We can say that Social Security is solvent, but the facts are that the Government does not have the cash to pay all the benefits. That my friends, by definition, makes the program insolvent.
This is why it is extremely important that we do not count on Social Security in our retirement plans. Hopefully, our elected representatives will get off the couch and figure out a way to save the program without bankrupting us, but are you willing to bet your golden years on it? I'm not.
Final Thoughts
For many of us, it's too late to start planning early, but it's never too late to alter our retirement planning strategies to make up for lost time. If you have children, drill it into their heads to plan now and not wait until later on. There are always a million reasons to put it off, but planning for retirement earlier will pay huge dividends.
http://www.articlesbase.com/wealth-building-articles/why-you-should-plan-for-retirement-early-4303143.html
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