Whether you are churning out green smoothies or busting out the weights, my guess is that retirement planning was not part of your new wellness goals. But let’s face it, all of that extra kale consumption isn’t just to make us feel better today. These small habits hopefully add up over time to help us live longer, happier lives!
Therefore, part of our wellness routine should be ensuring that we can enjoy the fruits (literally and figuratively) of our labor not only today but in the long-term as well.
The truth for many of us though is that retirement savings usually gets put to the wayside during our highest potential years. When I was signing up for my first 401K plan in my 20’s, retirement felt light-years away. I was much more inclined to spend my paycheck on eating out and partying when I lived in New York City. Our present lives quickly get in the way from investing in our long-term futures.
With 20/20 hindsight in my mid-thirties now (we all got some of that last year . . . right?), I realize how much more I could have maximized my savings in my post-college years.
Catching up for lost time costs much more in the long run when years of compound returns are foregone. Let’s say, for example, you have a pre-tax income of $50,000 at the age of 22 and diligently saved 10% of your income each year until the age of 67. Assuming a 3% inflation rate, a 2% increase in your annual salary, and a 6% average return on investment, you’re on track to save $1.42 million for retirement!
If, however, you wait until you are 40 to start saving 10% of your annual income (with an expected salary of $71,000 at that time), you will have only saved less than half of that amount, i.e. $550,000, by the age of 67.
A recent survey in 2019 by TD Ameritrade showed that a third of Americans between 40-79 have less than $50,000 saved for retirement. With the majority of employers no longer offering pensions and an underfunded Social Security program, very few safety nets now exist for those hoping to leave the workforce. We have to rely more on ourselves than ever to fund our golden years.
As Millennials and young professionals, we face a few other unique challenges that our elders may not experience. Here are a few other reasons you may want to consider double-downing on your retirement savings sooner rather than later.
Healthcare costs are on the rise
Inflation is a silent force that we cannot ignore. Although the Fed targets an average annual inflation rate of 2%, healthcare costs have more than doubled that rate over time.
Even the fittest among us are not immune to unexpected health conditions down the road. Healthcare will most likely play a large factor during our senior years.
We can only hope that legislation, insurance practices, and operating costs of healthcare practices will turn more favorable in the coming decades, but hedging your bets on one of the most basic human needs is risky.
Medical issues are cited as one of the top reasons that Americans file for bankruptcy. Therefore setting aside savings to cover medical costs both now and for the future is a smart move.
Life expectancy rates are increasing
Thanks to medical advances and a better quality of life (at least pre-COVID), we stand to live longer lives. The U.S. Census Bureau predicts that by 2060, the average lifespan could be well into our mid-80’s. And ladies, expect to live even longer!
This is great news for anyone who is hoping for a nice break after years in the workforce. Financing those extra years of life, however, may be a different story without proper planning. If you are already dreaming about your retirement party before the age of 70, it’s time to start thinking about how you would fund those extra leisure years on the beach.
Taxes are likely to increase
Post-tax retirement plans (otherwise known as Roth plans) are great options to take advantage of, especially during lower-income earning years. Contributing to a Roth plan such as a Roth IRA or an employee Roth 401K when you fall under a lower tax bracket can potentially shield you from paying higher taxes down the road when you start taking distributions from your account.
Even though it feels like taxes are always eating away at our paychecks, tax rates are relatively low compared to historical rates. Check out the historical tax rates for the highest bracket since 1913. Between the 1940’s-1960’s the highest tax bracket was as high as 90%!
There is a very good chance that tax rates will continue to rise in the coming years and decades. With the number of stimulus checks and relief programs rolled out this past year, a growing Social Security deficit, and an increasing wealth inequality gap among Americans, it is likely that higher taxes will be used as a lever to equalize and pay back our debts.
Funding a post-tax retirement plan while taxes are still low today is a good hedge against much higher tax liabilities down the road, potentially saving you a lot of money that will otherwise go to the government in the long run.
Maximize your retirement today
Despite a few unexpected events to ring in the new year, 2021 is slated to be a rosy year for investors. All of us are itching to get out in the real world again and resume our normal activities, likely fueling an economic boom over the next few years.
While we anxiously await the green light, now is a better time than ever to think about boosting your retirement savings before your money gets spent elsewhere. Here are three reasons to maximize your retirement savings today.