I heard a troubling statistic recently: a third of people (36%) in the US have nothing saved for retirement.
Even more startling is 26% of those 50 to 64 have nothing saved for retirement. Yes, one out of four who are very close to retirement age have nothing saved.
This blog is focused on those in their 20s and 30s, which means many reading this may think “so what? 50 is a long ways away for me.”
While that may be true, it’s also true that preparing for retirement in your 20s and 30s will have the biggest impact on whether you will be comfortable in retirement. Compound interest means a dollar saved at 30 has a much bigger impact than a dollar saved at 50.
Today I want to discuss 3 important steps to take to reach retirement.
1) Save and Invest
If you plan on retiring you absolutely must save and invest. Some argue that the government will finance their retirement through social security. In reality the average payout from social security is below $2,000 a month.
It’s important to not keep 100% of your savings in cash, though, as inflation destroys the value of cash savings over time. Instead it’s essential that you invest as much as you can.
In the U.S. this can be done through a 401k, 403b, IRA, or an individual investment account. While many employer-sponsored retirement accounts are serviced through a provider of their choice, you can choose any company you want to manage your individual investment accounts. One company I reccomend for this is TradeKing, which charges just $4.95 to execute a stock trade
Regardless of how you go about investing the important thing to remember is this: get started! The sooner you get in the habit of investing, the better. For further reference here’s 8 ways to start investing.
2) Live Below your Means
Living below your means goes hand-in-hand with saving and investing; it’s an essential step to take if you ever hope to reach retirement. Living below your means is also a prerequisite for saving and investing. After all, if you are spending more than you earn it’s impossible to set aside money to invest.
There may be times in your life that you do not live below your means. For example, many people take out loans to fund a college education. In a majority of cases it makes sense to get a college degree and can actually cost you money the longer you wait to get it. It’s not unheard of for college grads to double or triple their income overnight.
With that being said, student loan debt and other expenses can be a cause of people living beyond their means. There is a lot of pressure to have a certain lifestyle in your 20s and 30s, and for some people it’s simply not sustainable or affordable. Focusing on your own income and expenses – as opposed to other peoples – can help you live below your means.
3) Get Rid of Debt
A final step to take to reach retirement is to get rid of debt. As I just explained, the cost of student loans can be a roadblock for living below your means and, in turn, saving and investing for retirement.
Student loans aren’t the only debt that can prevent people from saving towards retirement. Car loans, mortgages, credit card debt, and personal loans are all things that impact someone’s ability to save and invest money for retirement.
Instead of focusing on getting rid of all debt I personally think it’s a better strategy to pay down only high-interest debt quickly and keep low-interest debt as long as you possibly can. Instead of putting additional money towards low-interest date consider investing instead.
Have you taken any of these steps? What do you plan to do over the coming years to take steps towards reaching retirement?
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It’s seriously terrifying that so many people have nothing saved for retirement! Eek! At the very, very least, folks should be contributing to some form of retirement account, as you mentioned. Mr. FW and I are abnormal and have a ton saved for retirement, but it’s possible for people to get started with just a few hundred dollars a month.
I was shocked at how many 60+ year olds I met while working at my former firm who had less saved for retirement than I did. They all rationalized that they had social security; however, for most of the social security only amounted to about $2,200 a month meanwhile they spend $4,000+. Needless to say, those people were my most frustrating to deal with and never seemed to want to listen to me about adjusting their lifestyles. They are no longer clients yet I sometimes lose sleep at night for them.
I spoke with investors all the time in my former day job who were in the situation of having little to nothing saved for retirement – while it was sad on many levels it was a huge encouragement to me to continue doing what we’re doing…if not more so. We’ve done all three of these and are continuing to focus on as many streams of income as possible and invest as much as we can. We’re not counting on Social Security at all. If it’s there when we retire, then great, but we’re not counting on it at all.
I took these steps as soon as I got my first job. I probably have my dad to thank for encouraging me to take those steps and for ingraining frugality into me. I also work in government so there’s the pension. I have mixed feelings about pensions though…my fellow co-workers mostly rely on it and don’t tend to plan for retirement. Sometimes a pension is a bit of a golden handcuff holding you to a job…while it’s a great benefit, I might prefer something that I have more control of and can take with me. I’ve also been very interested in those who retired early…30s/40s…I think it’s possible but probably not if I stay in NYC.
Saving for retirement is so important and it’s a shame that some people don’t realize it. I agree that paying down your high interest debt first is a good place to start then investing heavily early on. Taking advantage of compounding interest is a must for me. Hopefully after I pay off my car this year I can put more in my IRA.
Mrs. Frugalwoods Haha I hope my “abnormal” comment did not come off wrong in the past! But yes, a few hundred dollars can have a huge impact, especially if you do it starting at a young age (20s, 30s). My best retirement advice has been and always will be: get started!
FrugalRules I’m also not counting on social security. It’s really unfortunate that decisions made by people who are long gone are resulting in millennials subsidizing the retirement of the older generations despite the fact that we will never see the money ourselves. Not to say we shouldn’t honor our commitments to those generations, it’s just a tough pill to swallow.
Andrew LivingRichCheaply Good point about the pension. It definitely would be a “golden handcuff as you referred to it. Early retirement is an interesting topic. I more so would like to be financially secure so that I can be more selective of the type of job and work that I do.
Chonce I would love to put some money into an IRA. Currently I am just focusing on my 401k, ESPP, and a little bit of individual investing.
I’m currently doing all 3 of the steps. Once I pay everything off I will be able to invest a lot more.
I definitely focus on saving and investing and agree on this point:
“It’s important to not keep 100% of your savings in cash, though, as inflation destroys the value of cash savings over time. Instead it’s essential that you invest as much as you can.”
The point to add to get rid of debt could be have the caveat of saying get rid of non asset/incoming producing debt though :)
Smart tips here, DC. We are not planning on receiving a dime from social security, given its current financial state. Instead, we are dumping all debt and saving/investing.
Jason @ The Butler Journal Nice job, Jason. It’ll be great when you are able to invest more, too.
mycareercrusade Great addition, Jef. I also think it’s important to get rid of debt that isn’t generating an income and doesn’t help increase your income. I’m glad we are on the same page about having too much money in savings – gotta leverage that compound interest!
Laurie TheFrugalFarmer It’s encouraging to hear from more and more people that they are not banking on social security to help fund their retirement. I think one day it will be the majority.
DC @ Young Adult Money haha, not at all! We love being abnormal ;)
DC @ Young Adult Money Andrew LivingRichCheaply Yes, maybe early Financial Independence would be a more accurate term to use. One more thing about the golden handcuff though…it gets tighter the longer I stay because I’m going to think…well if I just stay 5 or 10 more years, I’ll reap the full benefits. But I don’t see me wanting to stay because I enjoy the work…it’s just the money. Even if I was financially secure, the greedy part of me will have a hard time missing the payoff.
Fantastic tips, DC! It’s so important to plan for retirement early on, especially in your twenties and thirties when time is on your side.
My Husband and I have been fairly good at saving the past few years, but we are really looking into investing more of our money and making that more of a priority the next few years so that our money can work for us instead of the other way around.
We’ve also been trying to tackle our debt as best as possible, and are working toward paying off my car completely hopefully this year, and then his shortly afterwards, which would leave us with just our mortgage debt. We would also have several hundred dollars extra each month to invest/save that is currently going into car payments, so that will be great for us!
DC @ Young Adult Money mycareercrusade Be careful though if we tell too many people it will no longer be a secret ;) haha
Cheers Dave!
Christina@EmbracingSimple I agree, any extra money you can invest is great. We also have car payments but I haven’t prioritized paying them down. I am very focused on increasing income so that I have more money to divert into investments. Once our student loans are knocked out that will free up quite a bit of money as well.