It's more important than ever for working-age Americans to prepare for retirement on their own. Yet as simple as it sounds to be able to retire rich, the reality is a lot tougher for most people. In particular, you have to overcome major challenges at difficult times of your life to stay on course for the kind of retirement you will want. Let's go through some common advice from financial planners, along with the reasons you might need a workaround in order to come up with a retirement strategy you can actually implement in your own personal situation.
The difficulties of saving 10%
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One of the simplest retirement rules you'll find is the suggestion to save 10% of your salary as early as possible. The longer you save, the more time your money has to work for you. Putting aside 10% sounds like just a modest amount that most people can easily do without. Yet consider the following:
- Median earnings for those with only a high-school education in 2015 were just over $2,500 per month.
- Student loan debt amounts to between $30,000 and $35,000 for recent graduates on average. That takes between $300 and $400 per month to repay over a 10-year period.
- Average rent for a one-bedroom apartment in U.S. cities ranges from $525 in Cleveland to $1,100 in Austin, $2,000 in Miami, and $3,600 in San Francisco.
Add to that all the other regular living expenses you have, and it can be hard to free up any money at all -- let alone the several hundred dollars per month that a 10% commitment would entail. At certain times of your life, just being able to put anything toward savings is a major victory, and you should celebrate it as such.
Dealing with competing priorities
As you grow older, you typically will have greater financial resources. Once your career has developed, you'll often be able to find more lucrative opportunities either at your current employer or by making a job switch. Increasing pay means more chances to save for retirement.
Yet here too, there are challenges. Getting older also means taking on more responsibilities. Many young adults choose to start a family or buy a home, while others have to start providing financial support to parents or grandparents. Just because your salary goes up regularly doesn't mean you'll be able to keep up with these added burdens easily. Instead, you'll need to find ways to balance your immediate needs with the necessity of planning for the distant future. What some financial advisors fail to recognize is that balance also means not completely delaying all gratification until decades from the present.
The danger of trusting your employer too much
Knowing that many workers don't save for retirement on their own, employers have increasingly looked at ways to spur participation in employer-sponsored retirement plans through automatic enrollment. These programs do have the positive impact of having more people actually set aside something for their golden years. Yet there's also a danger inherent in these automatic enrollment plans: the assumption that the automatic option is actually the best option.
Until recently, automatic enrollment options typically took a small percentage of your salary, often about 3%, and set it aside into a cash account that earned very little interest. The cash option was appropriate for almost no one, because even those who would be retiring in the immediate future would still need to have some of their money grow over time to provide for the latter part of their retired years. Yet because it happened automatically, many workers thought it was what they were supposed to do. By contrast, automatic options are almost never right, because they're not tailored to your individual situation. Take a deeper look at your own finances and then make a choice that fits your needs more closely.
Do what you can
Preparing for retirement isn't easy, and no matter how simple a set of rules might seem, following it can be next to impossible. In situations in which you can't reasonably follow an ambitious strategy, see if you can get at least part of the way there. That way, you can get a measure of success, knowing that you've done the best you can and keeping you aware of your financial situation for future use.
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