Despite being a crucial phase of life, there is still much ambiguity around what retirement looks like and how to adequately prepare for it. This unknown element can prevent workers from effectively planning for retirement.
Fortunately, financial guidance is one of the best tools to help workers start saving for retirement as early as possible.
The U.S. Department of Labor found that if you save $6,500 each year with a return rate of 7%, you’d accumulate $411,119 after 25 years. That amount doubles to $898,540 after 35 years, highlighting the importance of compounding interest over time.
Related: Dave Ramsey explains how your mortgage is key to early retirement
We spoke with Bob Powell, CFP and editor of Retirement Daily, to unpack some common misconceptions about retirement.
Powell notes that young workers underestimate the amount of time they have to plan and save for retirement, which could make it difficult to save sufficiently in the future.
Saving for retirement must be a priority for workers of all ages
For many reasons, younger generations tend to delay seriously focusing on retirement. This has typically been caused by the abstract nature of retirement planning, leaving many feeling like it only needs attention far down the line.
However, rising costs of living, combined with student loan debt and an extremely competitive housing market, have put Gen Z, Millennials, and even Gen X at a slight disadvantage to their older counterparts.
A Fidelity study found that 57% of Millennials, 56% of Gen Z, and 38% of Gen X have found saving for retirement particularly challenging over the past few years due to the rising cost of living. Too many recurring expenses and financial hardships are also common roadblocks to retirement planning.
More on retirement:
- The average American faces one major 401(k) retirement dilemma
- How your mortgage is key to early retirement
- A few simple tasks can can help you thrive in retirement
“Soft saving” and present bias are also popular among younger generations, who prefer to spend on experiences in the present moment instead of saving for their lives in retirement.
Powell dives into why younger workers should start saving for retirement as soon as possible despite a difficult financial situation.
“Well, one myth is especially for people in their 20s — they think retirement is 40 years away, so it can wait,” he said. “But they shouldn't wait. I mean, yes, they have time, but they shouldn't waste time thinking there's so much time between now and then that they can make up the difference.”
The younger a worker is, the fewer demanding expenses and financial milestones they likely need to factor into a retirement savings plan.
“It gets harder and harder, especially if you get married, have kids start saving for college, trying to buy a house,” Powell explains. “So instill that habit right from the get-go.”
How to create a plan for spending time and money
Powell also highlights an equally important yet less considered aspect of retirement: how you will spend your time and money.
“A lot of people get to retirement, and they get there, and they retire from something, but not to something,” He said.
Related: The average American faces one major 401(k) retirement dilemma
“They get to be 62 or 65, and they say, ‘well, I'm done. I'm tired. I have enough in Social Security. I think I have enough money in my 401(k), and I'm going to call it quits. And they do that without figuring out what they will do for the next 30 years of their life.”
Paying off debts, staying active, and seeing friends and family are the main ways to stay happy in retirement. Keeping a routine and planning enriching activities can also help retirees stay on track.
“Long before you say ‘I'm done,’ think carefully about what you're going to do in retirement,” he explains. “So often people who retire without something to do in retirement go back to work and often go back to work for the same employer they just left. And it's partly because they didn't know how they would fill their time.”
Powell underscores the significance of carefully planning your retirement and ensuring that you continue to have a purpose and long-term goals.
“Think carefully about what your purpose will be in retirement,” Powell concludes. “At the young end, take advantage of the forty years of savings you can have. And at the tail end of your career, think long and hard about what you'll do with twenty or thirty years of free time.”
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