Should Millennials Begin Planning For Retirement?
Think about your last vacation. Where did you go? What did you see? How long was it?
How long did you plan for it?
One week? Two weeks? More?
Now think about retirement.
How long have you planned for this?
You know, retirement is, in some sense, the longest vacation you’re likely to ever take.
Many people ignore the tasks of what makes up their financial lives and, eventually pay for it. It’s not because they don’t care but because they get overwhelmed with their obligations and the stresses of daily life. It doesn’t help that most people have little financial education and that the complex environment that the financial industry wrongly projects overloads the brain to cause inaction.
Nobody likes spending time on something that’s outside their depth. So they ignore it until it becomes a problem, and only then, do they feel the pressure. This pressure more often than not, causes a poor decision that’s based on fear. If you’ve read some of my previous articles, you’ll know that making decisions when feeling fearful is likely to turn out bad.
The lackadaisical attitude toward retirement isn’t just something representing our generation. According to the Insured Retirement Institute, 45% of Americans 65 years and older have no retirement savings. On top of that, 44% are carrying meaningful debt.
That means that many of these individuals aren’t going to be able to afford the rest of their lives. They’ll either be forced to downsize, relocate or rely on their children for support.
It’s a sad environment. And it’s even sadder that all of this could have been prevented pretty easily – by their decisions when they were younger. If these people simply saved 5-10% of their income each year in a low-to-moderate risk portfolio, they would be in a completely different situation today.
My advice to Millennials is to not let this happen to you. Due a myriad of factors threatening our future ability to afford a decent lifestyle, we need to be proactive and must ensure long-term financial stability by building wealth through investments.
One disadvantage threatening our generation is that it is increasingly clear that the two programs designed to keep us financially secure and healthy during retirement – Social Security and Medicare – are not sustainable. The long-term math just doesn’t work.
When we get a paycheck, we all have a set percentage of our salary deducted for Social Security (6.2% of the first $118,500 of income, an amount matched by the employer) and Medicare (1.45%). The system is viable only if the money coming in as taxes or contributions keeps pace with the money going out in benefits. For a while, the math worked. As of the late 1970s, retirees could expect to receive more in benefits than they had contributed.
But, for a variety of reasons, the numbers have flipped. And as the massive Baby Boom generation retires, and as our population ages as a result of both demographic shifts and longer life expectancy, the math will get worse. According to the 2014 Social Security Trustees Report: “The annual cash-flow deficit will average about $77 billion between 2014 and 2018 and after, the deficit will rise as the number of beneficiaries (claimants) is projected to grow at a substantially faster rate than the number of taxpaying workers.”
The promise of a comfortable retirement used to rest on a three-legged stool: the safety net provided by Social Security and Medicare, the pension plan provided by your employer, and your own personal savings. The pension plans (and gold watches) of an earlier era are vanishing. The so-called defined benefit plans of old (funded and managed entirely by the employer) have, for the last several decades, been phased out and replaced by defined contribution plans in which the financial burden and the decision-making is largely passed on to you, the employee.
So, in the new realities of the 21st century, that stool has grown a bit wobbly. Fortifying it, and stabilizing your future, is your responsibility.
Investing in Your Future
Anxiety about the present and future is real and rooted in actual events that have taken a toll on us as individuals and as a society. But this is the hand that’s been dealt to us. We have to plan and prepare for the worst and make smart decisions based on reality, not fear. In the parlance of Las Vegas, we have to be on the “wise” side of the ledger, not the “dumb” side.
And what do the odds tell us?
· Wealth inequality is only going to worsen in coming years.
· Government programs like Social Security and Medicare are increasingly unsustainable and may not be there to catch you when you fall.
· The era of working for one company your whole career, and then collecting your gold watch and pension, is long over.
· Future inflation is uncertain. The government’s recent quantitative easing program has pumped money into the economy. Eventually, an increase in money supply might lead to higher than expected inflation.
· The cost of real estate has bounced back since the global financial crisis. Low interest rates and international demand for populated locations are keeping prices inflated. Higher prices are preventing many Millennials from becoming homeowners.
In the well-known Serenity Prayer, the worshipper asks for the serenity to accept what cannot be changed and the courage to change what can be.
Some of the seismic shifts you can’t change.
What you can change, what you can control, is how you invest in your future.
Investing in the stock market—in a deliberate, strategic manner—is one of the best ways to generate long-term wealth and take control of your financial future.
If you want to learn more, check out my article Retirement Planning For Millennials on Investment Insecurities.