It’s a pretty familiar story. A person doesn’t pay any attention to retirement savings at the start of their career, deciding usually on the spur of the moment that it’s not really something they need to do right now. Usually, it’s not even thought about as something they should do “someday,” as it isn’t even considered that deeply. It’s just something that people think of as irrelevant in that moment.
Eventually, though, little things keep popping up in their life that directs their attention toward retirement savings. Maybe they’ll hear about their parents or the parents of a good friend struggling in retirement. Maybe they’ll keep reading news stories about retirement. Maybe they’ll see a Social Security benefits statement in the mail.
And, eventually, those little things add up to enough weight to flip that switch. They’ll start thinking about retirement on their own. They’ll maybe do a Google search or two and get all kinds of crazy answers.
And they’ll start to worry.
If that sounds anything like you, then you’re the exact person I’m talking to here. You’ve finally come to the realization that you might have to save for retirement and it’s frankly a bit overwhelming and scary and perhaps feels a bit unrealistic.
Let’s dig in to the most common questions people tend to have at this point, questions that many other readers have brought up over the years when at this very crossroads.
Why Do I Have to Save When My Parents Did Not?
Part of the reason that many people choose not to save for retirement is that it’s simply not something their parents had to do. Many children of baby boomers and even some children of older Generation Xers had parents who were lucky enough to have pensions provided by their employer.
A pension is a really wonderful thing. It’s an additional benefit employers offer their employees that guarantees them some income for life after they retire, usually based on years of service to the company.
Take my father, for instance. He worked for the same company for around 35 years, even through some tough years in the 1980s where layoffs were frequent. His reward for that loyalty was a pension that supplements his Social Security in the form of a check that arrives every month from his old employer.
On the other hand, very few employers today offer those benefits, especially to people my age. Some government agencies offer such pensions, but aside from that, they’re awfully rare.
That’s why many people in their thirties and forties and fifties today have parents that didn’t have to save for retirement — but that same benefit doesn’t apply to them.
Why Save When Social Security Exists?
Isn’t Social Security designed to ensure that people are going to be okay in retirement? It’s a nice theory, but it doesn’t reflect reality for two big reasons.
Reason #1: Social Security Benefits Alone Will Likely Not Support the Kind of Retirement You Want
The reason that many people’s parents have been able to have stable retirements isn’t because of Social Security. It’s because of a healthy pension (or other financial choices they’ve made). Social Security benefits alone simply aren’t enough for people to have the kind of retirement they envision.
Take a look at this Social Security calculator. Let’s say you make $40,000 a year at your peak and retire at age 65. Your benefits are going to only be $1,129 a month. That adds up to about $13,400 a year. Ouch.
Even if you hang on to age 70, your Social Security benefit is only going to be $1,658 a month which doesn’t quite add up to $20,000 a year. Again, ouch.
If you live a very careful existence, those benefits (with cost of living increases) will be able to allow you to survive and keep food on the table, but there won’t be much breathing room at all, and the cost of health care will be crushing. It just doesn’t add up for most people and the lives they want to live.
Reason #2: Social Security Will Have to Change in the Future
The long-term math for Social Security is on shaky ground. Exactly how shaky depends on which reports you read, but most of them tend to agree that the whole system is going to run into some difficulty in the future, as there will be fewer people putting money in and more people taking money out.
What will that mean for you? It’s really hard to tell because it depends entirely on which way the wind is blowing when the system begins to run into trouble in a decade or two. They may increase the costs for people paying in. They may also cut benefits. It’s impossible to say for sure.
Regardless of what happens, depending on Social Security as an absolute guarantee is likely a mistake. You should make plans that allow you to survive even without Social Security.
Should I Retire At All?
This is a question that many people eventually start asking themselves.
Some people come to the conclusion that they’re simply going to keep working at their current job until they are unable to do so, foregoing any sort of “retirement golden years.” This is essentially what my mother-in-law and father-in-law are doing, as they are traveling extensively during their fifties and sixties and using their time off from work to the fullest.
Related: Living an Amazing Life via the Reverse Retirement Plan
Other people plan on using their retirement for another career, one that will theoretically earn at least some money to supplement their Social Security.
Even if this describes you, having at least some money socked away for those later years will be beneficial. There’s no guarantee that you’ll have your current job then or that it will be stable when you’re in your sixties or seventies. And your employment options and income options may be limited — to say nothing of an unexpected health issue that could prevent you from working in your later years.
Retirement savings can make the difference here, even if it’s not enough to fully support your lifestyle.
When it comes to saving for retirement, your success really depends on how much you save, not exactly where you put it.