As of January 1, 2011, millions of baby boomers began to retire; the number is increasing by roughly 10,000 people a day. Many are depending on money that may not be there and many lost most of the value of their home and much of their 401k during a slew of recent financial crises. The reality of the retirement problems, and the skyrocketing healthcare costs, cause many to wonder if this may be the next great financial crisis.
However, though the present situation is sobering, younger generations can learn some invaluable lessons about saving for retirement, personal investing and financial planning; something that should start early even despite student loans and how daunting the task is.
Understanding the Early Years of a Retirement Saving Plans
Though most young people are familiar with the idea that retirement costs are already high and continue to increase, far fewer have a precise measure of how quickly. This is something that is extremely important to keep in mind, even for those just out of college as many costs of healthcare, particularly retirement, are increasing quickly and relentlessly.
Between 2011 and 2012, healthcare costs increased by 6%, and considering the increasing rate of chronic illness, this trend is likely to continue. Tangibly translated, if a 65-year-old couple retires, they are looking at more than $250,000 in healthcare costs if one person lives 20 years and the other 17.
Another alarming characteristic of those still in their early adult years and middle age is that almost 16% do not have a basic understand of their yearly expenses. B=cause of this many do not have long-range financial plans in mind and will delay planning for retirement until they are nearing 60 and have just five years to save.
However, as technology further integrates into the average person’s life, comprehensive financial planning apps make it much easier to link a budget app on a computer or smartphone directly to a bank account and debit card.
An Example Retirement Savings Plan: the First 20 Years
Age 25: In spite of student loans, young people should begin aggressively saving.
Age 31: By this time financial planners recommend having one year of annual spending put away into a retirement account. This includes all of the year’s expenses from rent to leisure. This is the most important part of the savings plan, because this money has so long to mature it can fund the last 17 years of retirement (83-100)
Age 35: By this time retirement savings accounts should have grown to 2 years of annual spending saved; however, saving will become more difficult as families grow and become more expensive.
Age 41: At this point, in order to retire comfortably, people should have saved 4 times their annual spending. Noticeably, the time to save a year of spending has been reduced by 50% which means most people will have to reduce spending.
Age 45: As retirement nears, financial planners recommend people have saved 6 times their annual spending saved by this age in order to comfortably retire at age 67.
Additional Age Based Benefits as Retirement Approaches
Though the benefits of ageing are often thought of as rites of passage for younger kids, as people near retirement they become eligible for a litany of other benefits they may be crucial in ensuring a comfortable retirement.
At age 49, workers can begin contributing $16,500 to 401k, a good idea considering maxing out what employers match reduces the personal burden of retirement saving. The money matched also frees up funds for investing in other areas. For those who did not save enough early on, catch up contributions are allowed at age 50. These additional contributions can be vital in an era of students loans as early savings will likely be depressed or sporadic.
At age 62, it is possible to begin claiming social security benefits at this time, although benefits will be 65-75% of normal if you begin claiming at this age. At age 65, Medicare eligibility begins. It is important to register early as there is a six month window surrounding 65th birthday, 3 months prior to the day and 3 months after, is the only point at which people can register penalty free. Every year people wait adds 10% to their premium. Finally, at age 67, full social security benefits become available to those born in 1960 and beyond
“Saving for retirement seems like a task that only the very wealthy are able to complete; however, in reality, it is possible for anyone that plans ahead and takes a vest interest in personal investing and finance.” says Daniel Guidotti of PFHub.
Especially if they start early.