What you need to know about retirement planning

Chances are, if you’re a twenty- or thirty-something, and especially if you’re a dude, you’ve given some thought as to what you’d do in the event of a zombie apocalypse. What you’d do, where you’d go, what you’d stockpile, and what kind of ranged weapon you’d specialize in (obviously, melee arms are not the way to go). Don’t be embarrassed. I have a plan too. We all do.

You ask these same people what their plans are for retirement, and most freeze. Many/most have not done any real planning at all. Of those who have, their planning is hazy at best. If they have retirement accounts at all, they’re not sure what those accounts are invested in, what those are, or how they work.

Many, if not most, of my peers and younger have given a lot more thought to the first scenario than the second. This is a well-researched phenomenon that basically boils down to a human aversion to planning for stuff that feels distant, scary and kind of unresolveable. Who knows what the future will look like in 30 or 40 years, after all? Why bother?

I’ve written before about how disastrously unprepared the Boomers are for retirement, and how their penury will likely cause major economic strain for our generation. But here’s my gist for this post: you should plan for retirement. At its most basic level, understanding this stuff is easy. I’m not selling you anything. But unless you have plans to die young, you’re probably going to need this stuff. So do future-you a favor and give this a little thought.

Future You

Identifying with “future-you” is the most critical first step. Here’s what I said in Ten Things I Wish I Had Known in My 20s:

Future-you is real. Very, very real. You will probably be 60 or 75 or 90 years old one day, and when that day comes, you’re going to need both money and your health. Plan your life right now to set up future-you for success. This requires real psychological work, because as humans, we are mentally hardwired to think in exactly the opposite terms. Thinking of future-you as real will change the way you approach your day-to-day life in some important ways.

Future-you can’t look you in the eye or talk yet, but they are nevertheless extremely real. The biggest single thing you can do to help – some might even say love – that person is to safeguard your health. That’s a separate, but at least equally important, blog post. Another huge thing, though, is to give that person enough money to live on.

I’m going to run through a quick example to show that you probably need to be saving a lot more money than you think.

How the money works

To keep this as basic as possible, just imagine the minimum amount of money you would need to live comfortably today. If you have a mortgage that you’re on track to pay off one day, assume you don’t need to pay for housing anymore. If you rent, then maybe include housing costs. If you have a family, and kids, then assume they’re out of the house and self-sufficient (a big assumption, but again, we’re keeping this simple). This needs not be bare-bones living or anything – just something basic that you’d feel comfortable with. Just as an example, let’s say you arrived at $60,000 a year for a married couple.

If you hope to retire at 65, and are 30 today, then in 2054, you’ll need $169,000/year to command the same buying power as $60k today. That what 3% average inflation will do to you. But we’re just getting started.

There are lots of online calculators to help you do this stuff – here’s one that I used, which is marginally less annoying than the others. The basics are this:

  • How old you are now
  • At what age you want to retire
  • How long you plan to need money (I’m shooting for 90, but who knows?)
  • How much money you need to live on (which we just established)

If our hypothetical 30 year old makes $75k/year (that’s household income, not individual), has $30,000 in retirement savings already, hopes to live to 90 and puts aside 10% of their income every year, they’ll have about $1.5 million when they retire. At $60k/year (or its equivalent in 2054 dollars), that couple runs out of money at age 84, six years short of their target. Oops!

I’ll save you some playing with the calculator. Having more money saved up front matters some – an extra $20k in savings to start equals $200k more 35 years from now. But your annual rate of return matters a lot more. An increase of just 0.6% (so 7.0% to 7.6%) gets you more than that extra $20k up front. Alternatively, starting with $50k in retirement savings still makes you $150k less overall if your annual rate of return is only 6%, instead of 7%. This same dynamic applies to how much you save every year. It matters, but it matters a lot less than that all-important annual rate of return.

The magic of compounding!

There is a ton you can learn and absorb about retirement planning, but this is the essential part. How much do you need, how much can you put in, and what, given a range of investment assumptions, can you count on getting out over time; these factors determine basically everything important.

Your parents’ advice is probably wrong

My parents, both of whom worked very hard for decades, are enjoying pretty comfortable retirements. They both have retirement savings, of course, but also enjoy generous pensions from their respective careers. They are also getting Social Security. (They read my blog every now and then, so I’m sure I’ll hear from them about this. Hey Dad!)

These three pillars – savings, pensions and Social Security – have been the basic assumptions of retirement planning for a few generations, and they are mostly invalid now. The 401(k) is only 40 years old, and the Roth IRA is only 22. As Morgan Housel put it in his outstanding blog post The Psychology of Money, “personal financial advice and analysis about how Americans save for retirement today is not directly comparable to what made sense just a generation ago.”

When I poll my generally well-informed peers about our expectations for retirement, fewer than half expect much or any support from Social Security. No one really knows what could happen over the next 30+ years, but I think it’s pretty reasonable to assume that some kind of entitlements reform will either happen, or be forced, in that time. Over the last 40 years, American voters – primarily Boomers – have steadily dismantled the social safety net, hoarded housing while throttling the building new stock, jacked up the consumer prices of healthcare and education and divested from public infrastructure. They’re aging into place by exploding the national debt while refusing to address climate change. Eventually, the bill for all that and more will come due, and we are the ones who will pay it.

Maybe that still leaves room for Social Security support for me in 30 or 35 years, but maybe not, either. It strikes me as a foolhardy thing to count on. Without pensions and with slim prospects for support from the government, it makes most sense for millennials to assume that we’re on our own.

My point in this post is not to freak people out – at least, not too much. I do think that a lot of folks don’t plan enough for the future, and at least in the millennials’ case, this has the potential to cause major harm down the road. Too many people assume that our parents’ approaches to preparing for retirement will also work for us, when they almost surely will not. In some ways, assuming that we’re on our own is liberating. It simplifies things. If we wind up getting extra benefits some some source, all the better! But if not, then at least we know what we’re dealing with.

So start dealing with it. Now. The biggest things you can do are these:

  • If your employer offers matching 401(k) contributions, then obviously do that. Barely more than half of people eligible to do this actually opt in.
  • Don’t hire a financial advisor. No, not a “robo-advisor” either. Most of them are crooks. Put your money in a low-fee Vanguard account. Don’t touch it.
  • If you don’t make enough money to save, review 1 & 2 on this list.
  • If you find that you’re spending too much money to save enough for retirement, take a step back and look at what you’re doing. You’re choosing to consume today instead of tomorrow. Is that rational?
  • Figure out at least a ballpark figure of what you need to save by some target date, and what annual savings gets you there. Figure out how you can do that.
  • Understand that the entire weight of our consumerist economy is positioned to convince you not to do any of this. It wants you to consume everything today. But it won’t some save you later. Remember that.
  • May the odds be ever in your favor.

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