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Retirement Planning Mistake 2 – Don’t Save Enough

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This is video 2 in my series about “The Dirty Dozen Retirement Planning Mistakes to Avoid”. Source:

Retirement Planning Mistake 2: Don’t Save Enough
Here’s a shocking set of statistics for you. According to the year 2000 U.S. Census Bureau data, the median value of all retirement savings accounts was a mere $18,000. If you add up all the retirement savings accounts by household the median jumps to a pathetic $31,000. If you take the median for all retirement savings accounts in the 55-64 age category (people near retirement) it’s still only $56,000. When you factor in those who have no retirement savings accounts the result is 75% of workers 55-64 years old live in households with retirement savings between zero and $56,000. And this was in 2000 at the peak of the bull market in stocks when everything was rosy. Yikes!
Nobody wants to be told to save more. The Puritanical value of savings is so often repeated that it verges on boredom, but here’s the reality. You are either saving for retirement today or consuming your retirement today. It is a choice you are making that has profound implications for the last 30 years of your life.
Saving for retirement is about priorities and alternatives. Do you take that five-star vacation now or go camping and buy a few years of comfort in retirement with the difference? Do you upgrade your car to a new model now or stretch its life with a few repairs so that you can enjoy new vehicles in retirement? A few inconsequential inconveniences today can compound over time into a comfortable retirement tomorrow.
For example, what is the real price of that fancy coffee drink you buy each day? $5.00 per day times 20 days per month for 50 years at 10% interest compounds to an astonishing $1,876,000.00 that could be saved for retirement. An espresso machine and a few minutes per morning filling a thermos bottle is a small price to pay for that additional security in your retirement.
And that is just coffee – imagine all the other places where your current consumption could be redirected to savings. It’s a lot easier than you might think. Most people find the savings habit addictive once they establish the pattern and see the results. It is not a matter of sacrificing as much as it is about redirecting priorities.
“If you would be wealthy, think of saving as well as getting.”
Benjamin Franklin
The reality is retirement planning is not a decision of whether or not to consume, but when to consume. Consuming now means your money won’t compound and grow to support you later.
The “no-brainer,” get-started-today, solution is to invest as much money in your company retirement plan and IRA’s as you can afford. At a minimum, you should invest enough in the 401(k) to get the company matching funds assuming they are offered. Nobody should pass on that opportunity. Yet for many people, even that won’t be enough.
Chances are you have already heard the “save 10%” rule of thumb. It’s actually a workable formula if you start in your 20’s and retire in your sixties without significant inflation or debt problems along the way. But retirement dreams vary, and if your vision is to retire at 50 with waterfront property then saving just 10% isn’t likely to cut it – particularly if you wait to start saving until age 40 or later.
According to Jack Vanderhei of Employee Benefit Research Institute in a PBS interview, you will need to save 13.3% of your total income if you are a male who retires at age 65 after working for 30 years and relies solely on Social Security and his retirement plan. A female needs to save 14.1% – employer and employee contribution combined – because of longer life expectancy. If you wanted to retire 5 years earlier at age 60 then contribution rates rise to 14.5% and 15.3% respectively.
Vanderhei is not a lone wolf in these seemingly aggressive calculations. Brooks Hamilton calculates retirement savings contribution rates between 15% and 18% of earned income depending on assumptions. This is greatly in excess of average savings rates for most employees.
And if that weren’t enough to shock you, Jack Bogle of Vanguard Mutual Funds fame points out people who don’t start saving until age 40 should contribute 25% of their income to fund retirement because they need to make up for lost time.
Clearly, the lesson here is to start saving for retirement early – and save aggressively. Every day you delay just raises the percentage of income you must save and increases the leverage and risk required to achieve the same financial goal. There is an easy way and a hard way to save for retirement, and the easy way is to start early and save aggressively.
Ask yourself, “What percent of my income is being saved, and is it enough?”

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