A Tale of the Obsessive Habit That Won't Come Back to Haunt You

I know young folks tire of hearing about retirement, but like the sound of the heartbeat in Edgar Allan Poe's "Tell-Tale Heart,"I won't stop repeating this mantra until everyone uncovers this truth: Start saving for retirement early in your working career.

Scary Stats

A recent study by Bankrate found that more than 20% of this country’s adults admitted that not saving for retirement early enough was their biggest financial regret. Their primary excuse for not doing so was that shorter term financial objectives took priority over longer term initiatives such as buying a home and/or automobiles and their children’s future education requirements.

When discussing this subject, I always feel compelled to mention the Amazing Power of Compounding, which requires a pair of important collaborative components - SAVING MONEY over A LONG PERIOD OF TIME - to be optimized.

Even if individuals start saving only a small sum each month - or week - those dollars saved today that compound for decades will make a huge difference in the long run. On the flip side, poor spending habits (those million dollar habits, I call ‘em) play featured roles when it comes to meager retirement savings.

Some S-S-S-S-SCARY statistics mentioned in the Bankrate survey:

22% of Americans haven’t contributed at all to their retirement account during the most recent twelve months.

29% of Gen Z’s (born 1997-2012) admitted they weren’t saving for retirement at all. Although still quite young, the older segment of this generation has been working for a while and should be saving. Their generation follows the Millennials (born 1981-1996). By the way, although lagging behind their Gen X elders (born 1981-1996) in home ownership and earnings, Millennials are on track to surpass their parents in one key source of financial security: retirement savings, according to Vanguard. Way to go, Millennials.

The average balance in Vanguard retirement plans was roughly $113,000 at the end of 2022…and the median balance was just $27,000. It’s likely that most retirees will be blessed with inflation-adjusted Social Security checks to supplement other retirement income sources – IRA, 401(k) and the like – but keep in mind that years spent in retirement often stretch across two or three decades. Do the math and think of the poor retirement prospects looming for these folks.

Those fact are frightening!

Fearful Thoughts

Are people worried about this lack of planning for retirement? According to the Bankrate survey, 41% of U.S. adults stated that insufficient retirement funds were keeping them from feeling financially secure, and 39% said being ill prepared for retirement had a negative impact on their mental health. It all goes back to that 20% plus of Americans who said that not saving early enough in life was a major error.

Without question, the recent past, which offered up Covid, a short but severe recession, overwhelming student debt, and this recent period of high inflation that the Fed continues to battle, has made it difficult for people to achieve their retirement goals. But poor spending habits have also played a part in many cases…as has the excuse, “I don’t know where to start.”

These are solvable issues. Resolving poor spending habits is a personal problem easily addressed. And your friends, family members, the internet, your workplace are teeming with useful information about saving and investing.

Fab-boo-lous Free Money

Speaking of today’s workplace, most offer participation in a 401(k) retirement plan – some automatically sign you up – and often match up to 100% of a percentage of your contributions. I call this FREE MONEY. A quick doubling of the amount you contribute. To not take advantage of this quick gain is…well…ill-advised.

Once you take maximum advantage of that “gift," you can contribute more funds either to a traditional IRA, which comes with an immediate tax break (you don’t pay taxes on those contributions and their earnings until you start taking withdrawals during retirement) or make contributions to a Roth IRA with after-tax dollars. In this latter case, you don’t pay taxes on withdrawals – including Roth earnings – during retirement. Those Roth accounts are ideal retirement savings vehicles.

And of course, don’t miss opportunities to invest in stocks along the way. I prefer mutual funds, preferably those “dare to be average” index funds, to gain diversification and a market rate of return over time.

Decades of Dollars

Those who start saving at a very young age – say, in their early 20s – will have gained a major advantage over those who don’t start saving until their 30s, 40s, and…shudder…50s. The dollars saved while very young will have much more time to grow through compounding as retirement approaches.

And by the way, it’s not unusual for those resources to keep compounding during another two or three decades, assuming good health in retirement!