What Young People Must Know About Retirement
When you’re twenty something, retirement isn’t on your radar screen.
That’s ok; you have other priorities. Retirement seems no more likely than flying to the moon or winning the lottery. In your twenties, detailed retirement planning is often a waste of time and money. There are so many unknowns and “what if’s” because you’re just getting your life established. But hold on- there are key principles that you should be thinking about as you map out your current and future life.
I am a firm believer in enjoying many things in moderation (alcohol and chocolate included). When it comes to money, too much saving or too much spending are both recipes for unhappiness over time.
Here is some retirement wisdom to keep in your back pocket while you are still young and free.
1) Enjoy your twenties but don’t waste your money. Yes, your salary will be low but so too are your other responsibilities. Once you have a spouse, kids, a mortgage and a car payment to manage, you’ll realize how easy you had it in your twenties!
2) Without a company pension, you’ll need to save more to sustain your lifestyle in retirement. Some experts suggest we save 10-20% of our income throughout our working lives. If you delay retirement savings until your thirties or even forties, you’ll need to save much more to compensate for less growth of your savings over time. At the beginning of your career, if you can’t manage 10%, at least start with something.
3) A large number of people do not choose their retirement date; it chooses them. According to a recent RBC study, 41% of retirees do not leave their jobs by choice. The reasons are varied- health challenges, downsizing, layoffs, elder or family care etc. If you lose or leave your job in your peak earning years, it can sometimes mean unemployment or underemployment for a longer than expected period of time. If you are a late saver and were counting on these years to save a big portion of your retirement income, you may fall short of your target.
4) Pay off debt before retirement to maximize financial flexibility. Be careful of unaffordable debt and its impact on your ability to save for retirement. How much house and car do you really need? Once debt is eliminated, redirect the same amount towards your retirement nest egg.
5) The unexpected will happen at some point. Having some extra savings can help smooth the impact while you’re dealing with the emotional fallout. Three days before Christmas when I was eight months pregnant, my husband totalled my car (luckily, he was not injured). I was thankful that some extra savings reduced our money worries at this stressful time.
6) How much you need for retirement is driven most by the lifestyle you desire. Do you hope to travel and golf or will you spend your time on cheaper activities and playing with your grandchildren? I’ve met people who believe that $200,000 of savings is more than enough and others who say $2 million of savings is not nearly enough.
7) Other factors that influence the amount you’ll need for retirement include: the age you want to stop paid work, whether you’ll work part-time in retirement, the risk/return trade-off and cost of your investments, your health and how long you’ll live (big unknowns)
8) Think your paid off house will be your retirement fund? Remember even if you downsize, you still need a place to live. How much home equity can you realistically free up for your retirement income?
9) Talk to some retirees and soon-to-be retirees. Ask them what would they do differently to prepare if they could do it over again? Many I have met wished they started saving much earlier.
Believe it or not, the grey hair will be here before you know it so it’s good to be ready. In the meantime, enjoy life today but put a little away for a comfortable future.
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