So many people come up with tons of excuses for avoiding saving for retirement. Every one of these excuses sounds good on the surface, but are they really true?
Instead of ignoring this important aspect of life, you should consider thinking about the major reasons why saving for retirement is a good idea.
Four of my favorite reasons for saving money for the time when you finally retire include:
- Relying solely on Social Security benefits after retiring isn’t the best idea.
- You don’t want to burden your children with your financial needs
- You can lower your yearly taxes by investing money into a tax-deferred IRA retirement account
- Investing over time triggers the compound effect, which is a great way to truly boost your happiness and levels of comfort in retirement
Are you beginning to see why saving for retirement is such a great idea? Keep reading to learn about each of these four reasons in greater detail below.
Relying Completely on Social Security Benefits Isn’t the Greatest Idea
First of all, when Social Security was first founded, it wasn’t set up to be retirees only form of income after they retire from their job. The Social Security Administration tells us that on average, Social Security will replace roughly 40% of a person’s typical wage.
Here’s the thing:
If you speak to a financial advisor, they will tell you that in retirement you’ll need roughly 70% of your former wage to live comfortably. Obviously, if Social Security only replaces 40% of your income, and you need 70% of your former income, you are still missing a large amount of money every month.
That’s where saving for retirement comes in handy.
It’s important to have another source of income – i.e. your savings – to make up the difference. But if you want to live exactly the way you lived while you were working, you’ll actually need to come up with 60% of your prior income every month. The best way to accomplish this without taking on another job is to save enough money so that it’s available once your retirement date finally comes to fruition.
Burdening Your Children with Your Financial Needs Isn’t the Best Idea
This is a bad idea for a number of reasons, but this is something that future retirees definitely need to take into consideration. Consider the following:
- Do you even have children to take care of you financially after you retire? If not, this obviously isn’t going to be possible.
- Are your children financially stable enough to begin paying your bills once you’ve retired? In today’s inflated world, the odds are very slim that your children will even have enough money to cover your expenses.
- Will your children be willing to take you in to their home to help you cut down on monthly expenses? I’m sure that many of them are willing to help, but you’ll really be turning their lives upside down.
- Would you prefer to live independently without having to rely on your children to cover your retirement expenses? You’ll feel great pride saving money for retirement while keeping your independence without the need for additional outside help.
Begin saving for retirement sooner rather than later. You’ll end up becoming a financial burden on the people you love unless you score a huge inheritance or manage to hit the lottery somehow, which likely isn’t going to happen.
Lower Your Yearly Tax Rates by Investing in a Tax Deferred IRA Account
Not only will saving for retirement help you live comfortably in your later years, but it will also help you live more comfortably during your working years.
For example, if you were to open a traditional IRA account, you are allowed to deposit a certain amount of money into this account each year. The amount changes year after year according to whatever amount the IRS designates.
In tax year 2022, account holders are allowed to deposit $6000 into this account if they are below 50 years old. For those who are 50 years or older, they are allowed to deposit $7000 into the account.
Let’s say you are 51 years old and you currently make $70,000 per year. If you were to maximize your contribution and deposit the entire $7000, you’d lower your yearly income to $63,000 for tax year 2022.
So, instead of paying taxes on $70,000, you’re only going to pay taxes on $63,000. This is a great benefit because it immediately allows you to keep more of your hard-earned money during your working years.
You aren’t responsible for paying taxes on this income until you begin taking distributions at 59 ½ years old.
Experience the Compound Effect to Truly Increase the Amount of Money Available to You in Retirement
The compounding effect is truly wonderful when it comes to saving for your retirement. Instead of boring you by explaining it, I’ll provide an example of the compounding effect in action.
Let’s say Jim begins contributing to his traditional IRA account at 25 years old. He deposits the maximum amount of $6000 per year throughout his entire work life until he reaches 70 years old, when he finally decides to hang up his work boots for good.
If Jim were to follow this path religiously and max out his contributions for 45 years, his hypothetical net worth at a 10% annual return rate per year would be worth $1,440,592.
Pretty amazing, right?
But here’s what you have to realize. Jim only deposited $270,000 of his own money into this account during those 45 years of work. Compounding interest grew this account exponentially to the point where Jim likely doesn’t have to worry about money ever again for the rest of his life.
Do you finally recognize the importance of saving money for retirement? It’s a great idea for many reasons. But it’s particularly important to help you remain independent, avoid becoming a burden on your children, and become fairly wealthy the slow way, even if you never make a big six-figure a year salary.