There is a self-confirming cynicism in some social networks that young people can’t possibly save any money for retirement.
The result of this pervasive attitude is evident in the personal savings rate which dropped as low as 2.2% in 2005, the lowest ever in United States history. The savings rate is defined as “the ratio of money saved by individuals or families to their disposable income (income after taxes).”
You should save at least 15% of your disposable income in order to reach your retirement goals because a savings rate of 15% from your early 20s to age 65 should meet your retirement goals.
The current personal savings rate as of January 2019 is about half that at 7.5%.
This implies that for every individual or family who is saving at least 15% of their disposable income, there is some other family who is saving nothing.
Saving and investing is dependent on an attitude that saving and investing is possible, simple, urgent, and valuable. If you are missing even one of these attitudes, you are more likely to relegate saving and investing to the pile of procrastination.
Saving and Investing is Possible
Sixty-six percent of Millennials (age 21 to 32) have nothing saved for retirement. When asked, people who are not saving always have a reason why saving and investing isn’t possible for them right now.
Some people are not saving because they believe that the government should or will take care of them. Others believe that capitalism will be abolished and replaced with socialism. To them, I say that we’ve tried socializing retirement and it doesn’t work. The government currently confiscates 15.3% of everyone’s pay up to $127,000. For that amount of savings, we should all be retiring as millionaires. Instead, the average Social Security benefit is just $1,342 a month. For most Americans, Social Security alone will not provide a comfortable lifestyle.
Others aren’t saving because they believe that civil society is likely to fall apart. They think we will see the end of the world as we know it in our lifetimes. They believe that their time and effort is better spent preparing for the “Coming Financial Apocalypse.” Being prepared is always a good idea. But you should be just as prepared for the possibility that the world as we know it is not ending.
That savings is possible ought to be obvious from the fact that there are people exactly like you living off 15% less than your income just as there are people who make 15% more than you do who can’t imagine being able to live off of your income. If you were to simply adjust your standard of living down to those who spend less than you, you would be able to save 15% of your take home pay.
In the United States, your standard of living is a lifestyle choice. You can either live rich and spend every dime you make, or you can grow rich by saving and investing. There are people comfortably living off half your salary. And there are people struggling to live off twice your salary. The difference has to do with contentment and gratitude.
And while you are adjusting your spending, set aside 10% more for unknown unknowns. Emergency budgets aren’t a dollar amount, they are an ongoing expense. Most families that have trouble saving money have trouble because of unknown emergency expenses. These financial shocks cause families with savings to spend them, and families without savings to go into credit card debt. Setting aside 10% of your monthly income for these unknown budget items helps make saving possible.
Saving and Investing is Simple
Some people aren’t saving because they don’t understand how. That is the simplest problem to solve.
The simplest method to make saving possible is to make failing to save impossible. The government understands this technique, which is why they require employers to withhold state and federal taxes from your paycheck. They know that most Americans don’t have the discipline to save money for taxes if you put that money in their checking account. You can use the same technique to force yourself to save money by paying yourself first.
Once you have automated the saving and investing process it will happen each month without you needing to do any additional steps. This one-time small change will result in large financial changes over a long period of time.
For those who want our help saving and investing, we offer a service level that provides investment management and helps you do much of financial planning yourself, which we call our “Do-It-Yourself Service Level.” Our investment management is a diversified portfolio of low-cost funds which we oversee and tilt dynamically each month based on forward P/E ratios and using the techniques of freedom investing. For this we charge a low 0.4% fee and offer additional bonus financial planning services at an hourly charge.
Saving and Investing is Urgent
If you save and invest 15% of your income starting at age 22, after 14 years at age 35 you will likely have as much as 3.265 times your income saved. At this point your investments will likely be making more in earnings and appreciation each year than you are contributing. That means that saving and investing between age 22 and 35 is more important than starting at age 36 and continuing for the rest of your life. This is always true throughout life. Investments double on average every six to ten years. For every six to ten years you delay saving and investing you cut in half the lifestyle you will have in retirement.
Because investment earnings compound, the sooner you get started the greater the growth potential. This makes getting started urgent.
It is easier to save money in your 20s than after you are married and have children. The additional expenses of children often make those years a more difficult time to save.
If you start at age 22, you really should have saved twice your salary by age 35. If you are starting late, you may want to save more than 15% of your lifestyle. By age 30, you may want to save 20%. And if you are starting at age 35, you may want to save 30%. If you are starting later, don’t despair. Start saving something because something is better than nothing. If you despair, you will never save and in retirement will have little or no assets to provide you with a standard of living.
Saving and Investing is Valuable
Regardless of income level, overspending causes poverty. Saving and investing produces wealth. Real returns favor holding stocks. And for those who are trying to save in savings accounts, the real danger to your attempts at saving is inflation. An inflation of just 3% will destroy 73.56% of the value of your cash over 45 years. Compare that loss with the return of even the worst 45 year period in the stock market. The markets are inherently volatile, especially in the short term. But the markets can also be very profitable.
Saving and investing is possible, simple, urgent, and valuable. Get started today!
Photo by Danielle MacInnes on Unsplash