Never Let Yourself Work Forever
Why Many People Cannot Afford Retirement and How You Can Prevent That
It’s an issue that seems to go unnoticed, but the majority of Americans (or the majority of the world) cannot afford to retire. Many people do not understand just how much money they need in order to live through retirement comfortably.
It’s a disheartening fact, and I am sorry to say that most of those middle-aged adults who are still working may never rest easy from it. One reason for that was due to heavy dependency on employers managing retirement contributions for them; employees never had to manage their own portfolios. Another reason why retirement is a distant dream was because of the 2007 recession and the fault of banks who sold “secure” mortgage-backed securities that caused people throughout the world to lose their assets. Not only that, but the public education system never really emphasized how important personal finance really is… you just, kind of had to know that it was.
While that is very unfortunate, it is fortunate that millennials still have time to invest into their retirement, and hopefully learn from the previous, awful economic events to avoid losing all hope for an easy elderly life. Millennials have more sources of information now than ever before. There’s no excuse to ignorance on how to best manage your money, especially investing into retirement. If you think you can put off saving and hope that you’ll earn enough in the future, you’re kidding yourself.
Notice how I mention “investing,” and not “saving.” There seems to be a misconception that doing simply the act of saving is sufficient enough for you to live off on. It’s not necessarily about how much you save in one go, it’s about where you save that money and how often you make contributions (and how often you leave those contributions alone).
So why should you start investing now?
First off, there’s inflation. By the time you reach 50 years old, the $100 you have in your pocket now will be worth significantly less after a few decades or years. Inflation is commonly known to increase by 3% each year, and if your math isn’t too great, idle money can lose their value quickly. As a result, your buying power decreases. Thus, the idle $100 you have today, will lose $3 next year (not literally, but any potential gains will be lost). The things you could have bought with $100 today will be $103 next year…
The time value of money concept is very important to keep in mind when making any investment decision. You being able to live comfortably in retirement very much depends on how well you can keep ahead of inflation. How do you stay ahead of it? That’s where the concept of investing comes in.
Investing is the idea of saving money and earning some money off of that money. In other words, you will receive a certain rate of return because you saved that money where you can reap interest, rather than just saving it and losing buying power. “Rate” refers to the percentage of interest you receive in a specific amount of time, and interest is good — when you’re earning it.
Where Do You Invest Retirement Money?
Unless you have a 401k plan with your employer, most people contribute towards their retirement into an IRA (Individual Retirement Account). Having a Roth IRA account is even better. And of course, these types of accounts are taxed. The great thing about having a retirement savings account is that it can invest into nearly anything. Want to invest in corporate stocks? Sure. Want to invest in mutual funds? Sure. Real estate? Don’t see why not. You can choose the rates of return that you want according to your risk tolerance level. The main difference between a traditional IRA account and a Roth IRA account is that the money you contribute won’t be taxed until you begin to withdraw (when you’re retired, not recommended when you aren’t), while the money you contribute is immediately taxed for the latter.
Why is it better to have your contributions taxed immediately instead of waiting until you retire? Inflation. You can contribute into a traditional IRA until it is maxed out, but by the time you retire and withdraw what you invested and your capital gains, tax rates would be significantly higher in the future than they are now. Tax rates and the products you can buy hold hands with inflation — their prices rise together and will never (unless there’s another recession) decrease. Tax rates aren’t only determined by inflation, they’re greatly measured by your current income. Naturally, it would be better to contribute retirement funds into a Roth IRA with our current tax rates instead of our future rates. It is after all, tax-free compounding.
Rates of Return: Your Return on Investment
The thing with investing, especially now, is that rates of return are somewhat low. Meaning, the gains you receive now won’t be much, and it won’t be for a while. It takes years and years to see any significant returns, and there are a few reasons for that. The obvious one — interest rates are low (they’re lower than they ever have been), and a 0.01% interest rate on a savings account is nothing. You’ll receive only a penny in one year for leaving $100 in a 0.01% (.0001 in decimal form) interest commercial savings account.
And that’s just for a regular savings account that doesn’t continuously compound interest. You want to invest in something that compounds interest continuously. That is how rich people grow to be even more rich because they invest large sums of money that gains interest UPON interest, eventually seeing their wealth grow exponentially. Non-rich people can have their wealth grow exponentially too, but it’s easier when you already have a good amount of cash that you can let sit and gain interest. The higher the dollar value of your investment, the higher your rates of return will be.
Besides interest rates and inflation, the types of investments you choose for your retirement savings account and your risk tolerance level are other factors that shows why receiving gains takes such a long time.
With stocks, achieving a somewhat good rate of return is very possible. The downside is that buying good stocks is expensive, and not all firms pay dividends. Not only that, but stocks are considered to be very risky, including options, penny stocks, and IPOs (Initial Public Offering). An example of the riskiness of buying IPO stocks would be Snapchat. IPO’s tend to have lots of excited buyers, which in turn causes the stock price to rise quickly because it is overvalued by investors, creating a bubble that will soon eventually pop. And that’s exactly what happened with Snapchat. Experienced investors who bought some of their shares of stock during the IPO should have foreseen that the Snapchat bubble would pop, and should have sold their shares before it did…
Bonds give smaller rates of return, but they are less risky and bonds issued by the government are almost, always guaranteed. Mutual funds and ETFs can give you a considerable amount of return, and they are less costly than buying individual stocks. Mutual funds are basically portfolios managed by seasoned professionals who pick investments for you, and you can choose whichever funds appeals to your risk tolerance level. Obviously, the mutual funds containing mostly stocks will give higher return rates with higher risk levels. Real estate is another example of an investment with high rates of return, but with all investments, there is an associated risk too.
IRAs and 401k’s usually contain the investments that were just mentioned, but they may also include savings accounts, CDs, and other investments with small return rates. The smaller the return, the less risky the investment is.
Conclusion: Time to Invest!
Because investing to gain wealth takes a long time, it is best to start investing into retirement as soon as possible. Those of you in your 20’s have some time to find a decent wage before you make regular contributions, but don’t ever hold off on doing so once you are able to. Those of you in your 30’s are a little late to the party, especially if you want to retire early, but you can still have retirement funds you can live off of if you start now.
Saving for retirement is becoming to be even more important and urgent because we will have longer life expectancy rates and inflation will only keep increasing. And for the love of all things good, do not delay investing and do not withdraw your contributions before you are retired. Take advantage of the interest rates, and the availability of information that you have.