It’s difficult for people in their 20s to see retirement as a pressing concern.
After all, they are focused on starting their careers, not winding them up. Beyond that, inflation has added to their daily living expenses, making it even more difficult to set money aside for the future.
But young people who fail to begin saving for retirement now, when time and compound interest are on their side, are missing an opportunity that won’t come their way again, says Chris Orestis, president of Retirement Genius (www.retirementgenius.com) and an authority on retirement planning, long-term care and financial health.
“Working towards retirement should be a very high priority from the moment a person gets their first job,” Orestis says. “If someone has access to a 401(k) plan, they should be maxing out their contribution from day one so they get as much pre-tax money into their account as they can. They also will get the maximum matching contribution from their employer.”
Those who are self-employed and don’t have access to a 401(k) should take advantage of IRA plans, which also offer tax-deductible savings, he says.
Someone who begins saving in their 20s potentially could have a seven-figure net worth by the time they are in their 40s or 50s, Orestis says.
“But a person who waits to start doing this in their 40s or 50s will never be able to catch up to the level that someone who starts in their 20s can achieve,” he says.
With each passing year, fewer people have pensions, which leaves savings and Social Security to prop up their retirements. And Social Security can’t do it alone
“The average monthly Social Security benefit today is about $1,600,” Orestis says. “Good luck living on just that.”
People also have misconceptions about how much Medicare will help them with healthcare expenses in retirement, he says. The government health insurance for older Americans definitely helps, but it’s not free. There are premiums and out-of-pocket expenses, which also will come out of any savings the individual has.
Yet despite the necessity for building a substantial savings for retirement, Americans are lax about it. The Federal Reserve Survey of Consumer Finances says the median amount in U.S. retirement accounts was $65,000 in 2019, the most recent year available in the survey.
Ideally, retirees should have enough savings to replace at least 70% of their peak income over their retirement years, which could last decades, Orestis says. Wait until age 35 to start saving and you would need to save 24% of your income over the rest of your working years, he says. Wait until age 45 and you would need to save half your income.
He acknowledges an early start isn’t easy, but is possible with disciplined money habits. Unfortunately, Orestis says, too many young people rack up credit card debt, pay expensive rent, and spend excessively instead of living on a manageable budget.
“It is hard to predict what a person’s life might look like decades in the future, but the realities of saving for retirement remain the same,” Orestis says. “Start saving early and be disciplined about living on a budget, avoiding debt and staying healthy. It is possible to retire early if you start saving early, but it is almost impossible to retire at all if you start too late.”