Budgeting and Self-Funding Retirement

As we begin the New Year, people often reflect on the past year and what could have been done better. Then we look to the beginning of the year with optimism and thoughts about what we would like to accomplish. Unfortunately, most Americans do not prioritize their need to save for retirement.

According to Lincoln Financial Group, most Americans wish that they could save more for retirement1. However, their current priorities are not allowing them to add to their savings. Nearly half of our country is focused on paying off short-term debt rather than adding to a retirement account. Living within our means is an issue many Americans struggle with. The all too common saga of never-ending debt will impact millennials the most. Almost half of this generation does not have a retirement savings plan, so they are losing out on the compound interest that they could be earning.

An illustration I often use with clients to illustrate compound interest is the rule of 72. The rule of 72 states that if you take a rate of return and divide it into 72 you will find how many years it will take for your money to double at that rate of return.

EXAMPLE : 72/10% rate of return = every 7.2 years your money would double

30 25K

37 50K

44 100K

51 200K

58 400K

65 800K

years of age

This is a hypothetical example for illustrative purposes and is not indicative of any particular investment or performance.

The example above illustrates a young person who was able to save 25k by the age of 30. If they didn’t contribute another dollar after the age of 30 but were able to obtain a 10% rate of return, their 25k would grow to 800k by the time they reached retirement age. The S&P 500 from 1928 to 2014 averaged a compound rate of return of 9.8%, which was enough to transform a $100 investment into $346,261 over those 87 years.

According to a survey by GoBankingRates, 56% of Americans have either less than $10K saved for retirement or have no retirement savings at all.2 However, the next largest group of Americans, 13%, have saved $300K or more. This drastic disparity in savings further illustrates how retirement funds can grow with time; savings that are started early in life and added to regularly have the potential to grow exponentially. Simply making the decision to open a retirement account and make small but regular contributions can drastically change your circumstances later in life.

I’d like to further illustrate the importance of taking accountability for your own future. The retirement game has changed for Americans and I fear most don’t even realize it. Forty years ago, Congress passed the Revenue Act of 1978, which includes a provision that allows employees to avoid being taxed on a portion of income that they decide to receive as deferred compensation, rather than direct pay. Why would congress do this? The answer to that question lies in the issues that Social Security was having at that time.

The provision for 401(k) in the tax code was put in place because there was and is a real issue with funding for Social Security. Congress needed to lessen the burden of America’s retirement on the federal government and incentivize Americans to start saving for themselves. This all sounds good at face value but what happened next changed the game. Soon, corporations realized that they could shift the retirement responsibility for their employees from their shoulders (in the form of a pension) to the employee (in the form of a 401(k)). 80% of your retirement income will come from your personal savings in the form of a 401(k) and 20% will come from social security and a small pension if you’re lucky enough to have one. Costs are steadily rising and you may need to fund a 30+ year retirement.

Current financial responsibilities such as credit card debt and student loans mixed with lower wages while young can make saving for retirement tricky, but not impossible. One of the most important aspects is budgeting. Saving for retirement is a necessary sacrifice. It is easier to save when you ask what will it mean to my family and me 20+ years from now? Those who are successfully saving for retirement say that although online banking services and other technological tools and apps are convenient, face-to-face planning is just as important. Meeting with a planner can help you establish a proper retirement savings plan, ensure that you are making progress towards your savings goal and can clearly illustrate to you the benefit savings will make in your life 10, 20, or 30 years from now.

Regardless of your age, the time to start planning is now. If you haven’t already, make 2017 the year you start planning for your future.

To learn more about what Insight Wealth Strategies can do for you or your colleagues in San Ramon, Point Richmond, Livermore, CA or Houston, TX, please call us at (800) 318-7848, email us at [email protected], or fill out the request information form.

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The performance of an unmanaged index is not indicative of the performance of any particular investment. It is not possible to invest directly in any index. Past performance is no guarantee of future results. Rates of return will vary over time, particularly long term investments.