Think Retirement Sooner Rather Than Later

Statistics show that the average American has less than $50,000 saved by the time they retire. The national savings average is less than 10 percent. And, people are living longer than ever with women’s life expectancies expected to be longer than men’s generally speaking.

What does this mean? Let’s assume for discussion purposes that the average American retires at age 70 (this number obviously varies by region, socioeconomic status, etc.), and they live until age 85. With $50,000 in retirement savings, they have less than $3,500 A YEAR to live off of (not including the growth on any of those assets during retirement), plus anything that they get from social security. Is there something in this formula that I am missing because this does not sound quite right?!

I think that what is missing is that not enough people run this calculation early enough to take action so that they will not be in this predicament. Why? Maybe it is because they have never been taught how to run the calculation, maybe it is because it seems strange to speak of retirement to people in their 20s and 30s, or maybe it is because we live in an instant gratification society where saving for something that will not provide a benefit for another 30, 40, or even more years does not seem to be worth the trouble.

Regardless of the reason, the calculation above should make you rethink the importance of planning for retirement. Let’s take a look at some of the options that one has to prepare for retirement:

1. Pensions, also referred to as defined benefit plans, are retirement plans where money is put away by one’s employer for an employee’s benefit at “retirement age.” At retirement age, the employee will get a certain sum every year or every month, called a pension. For various reasons, most companies no longer have these unless you work for a well-established company or an extremely generous small company.

2. 401(k)s, also referred to as “defined contribution” plans, these are accounts set-up by companies where the employee decides whether or not to put money away into the 401(k) plan for their own benefit at retirement. Employees receive a tax deduction for their contributions to their 401(k) plans up to a certain amount ($17,000 for 2012). However, to have this as a retirement benefit, you actually have to contribute something to it.

3. 403(b)s, essentially the same concept as 401(k)s, except for public entities and non-profit organizations.

4.IRAs, Individual Retirement Arrangements, are generally for people who do work at an employer that offers any of the options above.The concept is similar to that of a 401(k) or 403(b) in that you decide how much to contribute and contributions are tax deductible as well up to a certain amount ($5,000 for 2012).

5. Social Security is the government’s version of a retirement plan where you pay into the system through payroll taxes with each paycheck and receive a benefit at retirement age. The benefit that you will receive will depend on the length of time you worked and the amount that you paid into the system during that time.

6. Other work – Another option rather than saving for retirement is to not “retire,” at least not in the traditional sense but to find employment that is more enjoyable or perhaps less hours than your normal 9-5 grind. It should be noted, however, that this is a risky strategy on which to rely, at least completely, because this assumes that at retirement age, you will be healthy enough to continue to be employed in some manner. And, it assumes that you will find more pleasant employment that will also generate enough income to support you.

7. Other sources of income (non-retirement savings, inheritance) – Based on the statistics above on American savings, you most likely will not have a lot in savings upon which to draw down unless your behavior differs drastically from those of the average American.

In other words, it is highly doubtful that your own retirement will magically take care of itself or that anyone else will. Therefore, it is a good idea to look at the options above, determine which ones are viable, and DO SOMETHING to start taking retirement matters into your own control.

M