I try my best to not give generalizations when talking about retirement savings. You will hear all sorts of numbers thrown around. For example, you need a million dollars saved by the time you retire. Or you need to save 15% of your income each year. Or you need to base your retirement savings on a 4% withdrawal rate once you retire. These are common suggestions that we hear but I personally find most of these generalizations to be rubbish.
Each person is unique and their retirement situation and needs are going to be just as unique as they are. I understand that these generalizations are nice, easy and can seem to be helpful and uncomplicated. The issue is, there are so many variables that these generalizations can hurt all but the few normal people at the top of the bell curve. That being said, there is one generalization I adhere to. Time is your greatest gift when saving for retirement.
It is something we all need to unitize if we want to retire with as much money as possible from as little money invested as possible. I’m going to use a simple example to illustrate the power of time. If you invested $100 at a 10% return you would see drastically different results depending on how early you started investing.
This examples shows how powerful time is. As you can see, you could have 17 times more moeny from expanding your savings timeline by only 4 times. Most of us know this but we don’t put it into practice. You often hear people say they can’t afford to put money away for retirement. The fact of the matter is you can’t afford not to. Remember, the earlier you start to put money away, the less you will have to contribute in total. You have to begin somewhere, even if you start out with only contributing just 1% of your salary. Harness the power of time and don’t procrastinate it away.
A Future Retirement Solution for our Nation
I wanted to end this article with an idea that we need to press our elected officials to pass. That is to allow parents to open and fund retirement accounts for their children. Even if parents were only allowed to save $500 a year for their children up to the age of 16 in a Roth IRA; it would still change the retirement landscape in our country dramatically. I discussed the startling facts facing of our retirement situation yesterday and above I used a crude example showing that time is our greatest retirement asset.
So how can an $8,000 investment so dramatically change our retirement situation in this country? At a conservative retirement age of 60 and an average S&P return of 10%, your child would have $1.2 million at retirement from that small $8,000 investment you made while they were a child. Do you realize how amazing that is? $1.2 million of tax free retirement funds from only an $8,000 investment. I could easily see millions of parents wanting to jump at the opportunity to set their child up with such a large retirement account from such a small investment. If we simply removed the earned income contribution requirement for retirement accounts held by children, we could drastically alter the retirement landscape in this country.
Now for some more fun, let’s take this example a step further. Lets say a similar program was setup for medical costs. Lets say parents could contribute up to $100 into an HSA that couldn’t be accessed until the child reaches age 60. By the time that child reaches age 60 they would have $238,000 available to pay for medical costs in retirement. Talk about a game changer. A small $1,600 investment could pay for all medical costs in retirement based off of the figures discussed yesterday.
In the end, we constantly hear ideas of how to fix Social Security and Medicare but why not replace them? Why tax people to support broken and ill equipped systems when a better solution exits? Pensions have failed in the private sector so what makes us believe that the government can run these programs any better than the private sector could. We could revolutionize the retirement landscape in this country with a few simple changes. We have to do something and putting the power back into the hands of parents and families is a far better solution than simply taxing people for a broken government program.