It's important to consider saving for future retirement costs even when you're young. It's commonplace for those in their 30s and 40s to use their money for their immediate needs: housing, education, childcare and (of course) fun. So why save when retirement is decades away? It's simple: Only you are responsible for your retirement needs.
While you may be able to secure loans, grants and other financing for things like housing or advanced education, it may be difficult to secure additional money for your retirement. Even starting to save a year or two earlier could make a significant difference in the lifestyle you'll lead as a retiree. Additionally, it's important to consider both the expected — and unexpected — retirement costs when planning.
Create Your Emergency Funds
As you likely already know, unexpected expenses can and do arise — even if you've carefully planned out your finances. In addition, the rising cost of rent, property taxes, food and other everyday expenses can take a toll on your bank account.
Now, consider the fact that you could face all of those expenses and more when you retire. Retirement brings with it a new set of costs that many younger adults don't consider until they're close to retirement age — like medical expenses or rising homeowners association fees, which are quite common in many retirement communities around the United States. While those extra retirement costs might seem trivial, they could potentially sink your future lifestyle plans.
Although age 65 has long been the assumed retirement age, the U.S. Census Bureau reports that most adults retire at age 63. That might sound positive, but the average age of retirement has steadily increased throughout the years. (The average actual retirement age was 60 only a decade ago, according to Gallup.) Additionally, many financial benefits for retirees — including Social Security, Medicare and various tax breaks — don't begin until age 65. This means you might not be able to count on those programs to cover your retirement costs in the future.
Saving When You're Young
Even if you don't know many of the variables — whether you'll marry, have children, buy property or want to continue working past retirement age — consider the following ideas to start saving. A head start could mean the difference between struggling and thriving in retirement.
- Form Your Game Plan: You can't see into the future, so you don't have all the answers for what you'll face in your later years. But you can use an online retirement calculator to get a ballpark idea of what you might need in the future. Once you have an estimate, you could create a monthly budget now and help calculate how much money you may need to save each month to reach your retirement goals (and potentially cover your retirement costs).
- Curb Your Spending: That might sound obvious, but many people spend all of their income — and also carry credit card balances, automotive loans and other major debt. Laurence Siegel, research director at the CFA Institute Research Foundation, suggests that young adults save and invest a percentage of their annual income — between 15 and 30 percent — to pay for future retirement costs, according to Time's Money magazine. However, even investing $200 a month may help you build retirement savings and help get you into a disciplined habit of saving.
- Research Your 401(k) Options: Many employers offer plans like 401(k)s and match the pre-tax contributions of employees. Consider taking advantage of your employer's match (if you have one) and think about investing the maximum amount. You may also want to learn the details of your particular plan — like if you need to work at the company a certain period of time before you are eligible to receive a match.
- Consider Working Past Traditional Retirement Age: If you're in good health when you retire, you may want to put your expertise to work as a consultant. Everyone — from bankers to auto technicians — has opportunities to do this in the current work environment, often virtually. Consider building the necessary skills to take advantage of future opportunities, which could bring in some extra money to help pay retirement costs.
Adults in their 30s or 40s are often excited to buy new cars, high-end housing and other extras. But before you do that, it's important to think about preparing for the future you. This could help you maintain your desired lifestyle in your later years — and bring you peace of mind now.