Saving for retirement is so ingrained in me that I often forget this basic question: why should we save at all? I think that most of the common arguments are pretty clear and obvious to most Americans: Social Security may not cover everything and you may live a long time in retirement so you will need some additional savings to meet needed expenses. These are good reasons but they are not the types of things that get people motivated to stash away money today. Money today can buy cool stuff and trips, who would want to eschew that to save for something 20, 30 or 40 years away?
So I’m going to give you a few more compelling and detailed reasons, some financial, some medical and some lifestyle that will hopefully put a little more fear into those who believe they can do it later.
Things Don’t Turn Out as You Plan
Some people have told me with a straight face that they are just going to work until they die. They offer reasons like the fact that they just love their job or they just prefer to keep busy every day.
If you are lucky enough to really love what you do and love it enough to do it every day until the end, good for you. You have achieved something in this life that many people never will. However, your hypothetical situation of croaking on the job is not in line with reality.
The fact of the matter is, as people live longer, we are dealing with different ailments that develop as we age. Our muscles get weaker, bones more brittle and organs start to break down. For an older worker this will start to mean more missed days for health reasons. A minor surgery, a broken bone from a fall or a major diagnosis like cancer. No one plans on these things happening but they start to become much more likely to happen as we age. This will mean more frequent trips to the hospital, the doctor or physical therapy and these places don’t always accommodate working hours. We take for granted our mobility and all the other things we do outside of work as we age as well: running errands, driving, cooking etc. it only takes one incident that limits your mobility for a short period to put all this in perspective and realize that being physically able and mobile is a really important aspect for taking care of ourselves. Even limited mobility, meaning you could do half or two thirds of the tasks you could perform before has a dramatic impact on what you are able to do on a day to day basis.
Even if you have an ailment like a heart condition or diabetes which means you can still perform many tasks, it may mean increased medication, required exercise and consistent monitoring of your condition. Again this will take frequent trips to doctors and specialists and is not conducive to someone who works a full schedule. At this point, if you are already on social security, disability won’t make a difference, if you aren’t already leaving a job for health reasons, you may be pressured to retire anyway.
Then there are those catastrophic situations, where there is a fall that produces a broken hip or an illness that keeps you bedridden. At this point, any concept of working goes out the window, just getting up and bathing is a daily struggle and with little to no money, you would likely be sent home from the hospital as soon as possible to reduce their costs. Once there, with only social security, who is going to take care of you? At this point you can’t bathe and do basic tasks without assistance. The choices will be to be forced into a home that accepts payments in social security, which have dismal care records and if you can’t pay, you could be out on the street, even if you are recovering like this story here. What this eventually means is that if you don’t have the money for proper care, the burden will likely fall on any children you have to take care of you, which could then put enormous pressure on their daily lives as well.
I haven’t even gotten into dementia either. More and more, the medical profession is able to keep our bodies relatively healthy well into old age but our minds can’t keep up. Once dementia starts to set in and we can’t remember what someone said or what we did a few minutes ago, it will make working almost impossible.
No one plans for any of this but it’s almost an inevitability of old age. I have seen these unintended circumstances often as the former owner of a nursing home. Once these things happen to you in old age, you can almost surely kiss working goodbye. If you haven’t saved by that point, your options become few and desperate. Please don’t be one of these people.
You Can Take More Risks
Enough of the dire and depressing medical talk though, there are also other reasons to save that can benefit you in the more near future. One is the ability to take more risk. It sounds counterintuitive, but once you have a cushion to fall back on in old age, it allows you the confidence to take risks with the little bit of money you have left over currently. Feel your retirement is on track? Good, but what else do you want to do? Whatever it is, a little bit of money probably couldn’t hurt it. So start the next goal and start saving towards that goal. The opportunities available to all of us now have the ability to empower us to do more than we can imagine is within our grasp at this very moment.
For example, if you were on track with your retirement or at least had a decent chunk saved and wanted to start a business, the good habits you have developed saving for retirement could help you plan to save outside of retirement. Starting a business is indeed a risky proposition but knowing that even if you lose it all, you can still fall back on going back to a job and having your retirement still set can help give you the confidence to take that leap.
This is all assuming that you mentally put your retirement in a box that you don’t touch for a long time. This is the way that I think of my retirement money. Once I put it away, it’s essentially in a box buried underneath the house. Unless I am willing to destroy my house to get to that box I am not touching that money. Too many people get tempted in hard times to tap into that retirement money through loans or even worse, taking it out and paying the taxes and penalties. I honestly would live on my mom’s couch before touching my retirement money and that’s the way many of us need to think about it in order to reap the benefits of long term compounding in order to have a sizable nest egg in old age. If you have this discipline so that your retirement will be set no matter what, it can allow you to take those big risks for big goals that you have set for yourself in the near future. Again, if it doesn’t work out, at the very least you can live without regret in your comfortable retirement knowing that you did everything in your power while you were younger to try and achieve your goals.
How Much is Enough?
It’s not just necessary but it’s exceedingly easy. With employer matching, easy IRA setups and cheap index funds, it’s as easy as ever to start saving. Even if you are in a job that doesn’t offer any retirement benefits, getting started early and being consistent will long out perform any temporary inconvenience you may have currently, be it bills or student loans or whatever.
To give you an example, let’s say your company doesn’t offer any retirement plan or you are a contractor that works on their own. You calcule easily start an IRA or a Roth IRA to put away $6,000 a year. $6,000 sound like too much? Then break it down to months, you can put $500 away a month to reach $6,000 by year end. If you were to place this money into an index fund that tracks the S&P 500, which has returned 10% annually over the past 100 years you will be able to easily retire with much more funds than many of your peers. If you were to start at 25 and retire at 65 under this scenario, the results are below.
Source: calculator.net
A few notes on this calculation: I have compounded this on a monthly basis which is why there are 480 periods and the interest rate is 0.797% which compounded by 12 months makes 10% annually. This also doesn’t take into account inflation. In today’s dollars, assuming 2% annual inflation which is the Fed’s target, this would make the sun about $1.2 million in today’s dollars. The limits for the IRA tend to increase with inflation so if you increased the amount saved with the limit, $2.7 million could actually be a reasonable figure in today’s dollars as well.
Even if you are starting later like at 30, it’s not too late.
Source: calculator.net
Just those 5 years of not saving cost you $1 million but that’s OK, you still have time to benefit from compound interest and at least make your retirement not come down to terrible choices.
Conclusion
There is always an excuse we can come up with not to save but when we get stuck in a tough situation due to bad decisions made long ago, it’s too late to realize you could have done more to take care of yourself. Even if it’s a chore, don’t put off savings until tomorrow, start now and don’t end up another struggling story in your old age.
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