Building a retirement nest egg doesn’t happen overnight. Through habitual saving and proper investing, you slowly grow your net worth through time. Many investors are initially enamored with the concept of compounding returns – the 8th wonder of the world as Albert Einstein put it. After several years, however, it often seems like compounding is not going fast enough. Funny how we think. Compounding is a great concept; your money begins to work for you.
Starting early is important. Compounding works like a roll of toilet paper.. hear me out on this.. it starts slowly at first, but then seems to go faster and faster toward the end! The problem for those saving for retirement is that if you start late, you are not giving yourself enough time to see those big returns that come after decades of growth. Of course, it’s better late than never when it comes to establishing and growing your nest egg.
Unfortunately, many Americans have next to nothing saved for retirement. According to a 2019 study, 22% of the county has less than $5,000 saved for retirement. Yikes. We as a nation need to step up our game. But that also means you are not alone if you have very little saved.
Our economic system has some safeguards in place should you have nothing saved for retirement. I stress “some”.. Uncle Sam is not going to just dole out a bunch of cash to you and provide you every necessity of life. Sure, there is Social Security that yields a small monthly benefit and Medicare/Medicaid to assist with health-related expenses, but those just won’t cut it in terms of providing you a secure retirement.
You can think of retirement as a three-legged stool. The first leg listed below needs to provide the bulk of your support:
- Your savings – this is the biggest piece. You need to take ownership and save through tax-advantaged accounts like your 401(k) and IRAs. If you have not done so yet, contribute as much to these accounts as you can (taking the proper amount of risk, of course).
- Employer contributions/pension – the best most of us can do nowadays is hope our employer provides a matching feature and maybe a small profit-sharing account. Relatively few firms still offer a full-blown defined benefit pension plan anymore.
- Social security – you can go to SSA.gov to see what your estimated monthly benefit could be, but once again, you are not going to get rich off Social Security.
Most people will have some Social Security coming their way (and it’s good to delay taking your benefit to age 70!) and you will likely have some modest savings through retirement accounts (or even equity in your house). In reality, very few people truly have no savings immediately before and into retirement.
Gameplan – Let’s say you truly have nothing saved for retirement. We’ll also assume you have the smallest reasonable Social Security benefit possible (about $900 per month which is near $10,000 per year). You are between a rock and a hard place, no doubt about it. You will be forced to continue working and will likely have to move in with family to reduce your expenses. For health care, you have to wait until age 65 before going on Medicare, so you could be without health insurance until then if you are not working. If your income is low enough, you might also qualify for Medicaid. These are dire circumstances!
The silver lining (if we can call it that) is that while Americans are woefully under-saved for retirement, we also don’t see grandma and grandpa lying in the street, for the most part. We certainly understand that there are homeless individuals in our society, so we are not making light of that tough reality. When times get tough though, Michiganders and the nation as a whole cares for one another, especially our elderly. Government assistance and family support are what you would have to depend on.
You have the power today to control your retirement starting now. Work hard, save diligently & methodically, invest through your 401(k) and IRA, try to stay healthy as you age, and keep your big expenses like housing, transportation, and eating out in check.
Here’s the point
- If you have next to nothing saved for retirement, you are not alone. Many individuals struggle to save money as expenses continue to rise over time.
- If you are nearing the traditional retirement age with a $0 retirement balance, you might need to have the difficult conversation with your family about moving in with them to make ends meet should you be unable to keep working.
- If you have many years to go before you retire, take ownership of your future by saving and investing. The earlier you start, the more time you let compounding work for you!
Action items
- Contribute up to your company 401(k) match and invest in low-cost index funds.
- Set aside a little bit of money per month to contribute to a Roth IRA, then have that money invested into the market. Don’t know how to do this? TFC is here to help – we can guide you along the process of establishing a retirement savings plan tailored to you.
- If you have nothing saving, delay taking Social Security to age 70 and keep working as long as you can. And be a super-saver from now on.
- Talk with your family about finances. Unfortunately, money is still a taboo subject in our society. We should all work together to help one another in the journey toward a solid retirement. After all, they are called your golden years for a reason!
Photo by NeONBRAND on Unsplash