Most people dream of a time when they can quit their day job and pursue what they truly love. Yet, when you ask young people about retirement, they tune out, equating “retirement” with “walker” and “adult diapers”. Retirement is not about being old. It’s about no longer being dependent upon your time and labor for money. Retirement is financial freedom. Some people are able to retire in their 30s and 40s. The truth is, if you’re determined and start early enough, retirement can happen sooner than you think. Below are 10 common reasons people are unable to retire.
#1 You haven’t started saving for retirement at all.
You’ll never retire at this rate.
According to a study by Bankrate, the biggest financial regret Americans have is not starting their retirement savings early enough. They discovered, too late, that the easiest path to wealth is over several decades. Time leaves room for error and also gives the magic of compounding time to do it’s job properly. When you start paying yourself early and putting your money to work, the results can be mind boggling.
- $1000 invested at age 35, compounded quarterly at 10%, is $19,358 at age 65.
- $1000 invested at age 20, compounded quarterly at 10%, is $85,171 at age 65.
- 15 extra years results in over 4x the money, with no extra contribution from you. When it comes to building wealth, time is your best buddy.
#2 You aren’t getting your 401k match.
Only about a third of the labor force is participating in an employer-sponsored 401k program. Hopefully you’re one of those. Your employer may not offer one, and if they don’t, you definitely want to look into a Roth IRA, discussed below. If your employer does offer one and matches your contribution, it’s imperative that you contribute whatever they’ll match. Many sources say not taking it is “turning down free money”, but that isn’t exactly true. They’ve already priced it into your pay, so take it. It isn’t free, but it is turning down money. We don’t do that here at Bottom Up (insert side eye).
#3 You aren’t contributing enough.
You’ve signed up for the 3, 4, maybe 5% 401k contribution to get the match from your employer. Well done. Unfortunately, that probably isn’t going to be enough to live on for 30 years or so. You should also have a Roth IRA, not only for the extra contributions and investment options, but for the tax benefits. I’ll get to that below. How much you need to save will vary from person to person, depending on a number of factors such as your health, your lifestyle, genetics, etc. At minimum, you should aim for 10-15% of your pre-tax income, and then plan how to increase from there.
#4 You’re putting ALL of your retirement funds into your 401k.
I’ll be honest and say that 401ks kind of stink. Just about everyone should sign up to get the match from their employer, but it’s generally not the best place for your entire retirement savings. Not only are they usually limited on investment choices, but the funds offered often charge fees up the wazoo. Also, they’re tax deferred, which means you don’t pay taxes on your contributions now, but at age 65, get ready to pay all kinds of taxes on that hunk of money. If you look at historical tax rates and today’s tax rates (along with US tax rates vs tax rates of other developed nations), I’d be willing to bet everyone will be paying substantially higher taxes in the future. Update: I dug in to 401ks and was pretty disgusted by what I found. Read more about them in 401ks Are Where Dreams Go To Die.
I’ll keep singing my mantra: get yourself a Roth IRA.
#5 You aren’t investing wisely.
Today’s CDs, bonds and savings accounts are not going to give you the kind of growth needed to outpace inflation. For most people, there are better options. Here’s where your investment advisor comes in handy, to help you select investments that will be fitting of your particular goals and risk tolerance. Generally speaking, you can be more aggressive when you’re a younger investor. This is because markets go up and markets go down, and when you’re young you have time not only for compounding to deliver it’s magical goods, but to wait for recovery if the market goes sour. For more info on smart investing, download our free guide, How To Become A Killer Investor!
#6 Your hand is in the cookie jar.
Listen to me.
Never, ever, EVER borrow from your retirement accounts to buy things. Ask yourself, Is this purchase worth having to push carts at Walmart at age 90 so I can eat? I’ll help: NO.
Some situations could be different. Investment in a business? Maybe, if your risk tolerance is suited for it, your business plan is rock solid and your ROI will be significantly better. Keeping from losing your house? Okay, maybe. It’s hard to build wealth when you’re homeless. Maybe we need to revisit how much house you can afford. Getting a jet ski? Don’t make me come over there.
#7 You’re focused on paying off your mortgage.
Some financial gurus have popularized paying off your house as quickly as possible before funding your retirement. With long-term investing, time is everything. No one can afford to put off their retirement contributions. With interest rates as low as they are, putting all your money towards paying off your mortgage is a serious misappropriation of funds, if you ask me. If your mortgage is at an interest rate of 4%, you’d have to be in some rather expensive or poorly performing investments for that to be more profitable than saving for your retirement. You can check out whether it’s better for you to pay off your debt or invest with our calculator.
#8 You’re busy paying off student loans.
Like your mortgage, if you’ve got an interest rate on the low side, it’s not worth forgoing retirement contributions and missing out on all that beautiful compounding.
#9 You don’t have a Roth IRA.
Roth IRAs are a lovely invention. Unlike a 401k or traditional IRA, you contribute to it with after-tax dollars. Also unlike the aforementioned accounts, when you withdraw from a Roth, you pay no taxes on your contributions (because you already paid them) and you also pay no taxes on your earnings. This is big. Not only will taxes probably be higher in the future, but remember that $1000 from the beginning of this article that grew to $35k? Imagine if you’re making regular contributions, and all those contributions are compounding nicely, the way they’re supposed to. That’s a whole lot of money and a whole lot of taxes. If you’re stashing that money into a Roth, your tax obligation on that money is $0 in retirement. Coincidentally, that just happens to be my favorite tax obligation. Read more in 10 Steps To Start Investing.
Got $5? You can open your Roth IRA right now! I researched a bunch of brokerages to find the one with the best fees. Click the button below for step-by-step instructions for opening.
#10 You don’t have an investment advisor.
Now, you don’t need an investment advisor to accomplish these things. You can complete each and every task on this list yourself. However, I’ve pelted you with a whole lot of information. Chances are, left to your own devices, you’ll set your phone down, back away from it slowly, and do nothing because you feel way overwhelmed. This is a mistake. Retirement is not something that you can wait to think about when it’s time to retire. You have to contribute now, in the right amounts, with the appropriate investments, in the most efficient types of accounts regarding tax liability. Doing nothing can cost you big. With an investment advisor, you can let her do all the dirty work (fiduciary duty and all) and get back to Pokémon Go.
*This was a rather bossy post, don’t you agree? I get excited talking about Roth IRAs and years of compound interest. While it’s important for everyone to prepare for retirement, it bears repeating that every individual has different needs and yours may or may not include the information given here. This article is intended to be a starting point for your research. We encourage you to read our disclaimer, complete your due diligence, and consult the appropriate professionals before making any investment decisions.