A Shift in Strategy
Once I killed my credit card debt and could focus on my student loan debt, my intention was to throw every spare dollar I had at it, to the exclusion of everything else. I planned to keep my retirement savings down to 5% to get my employer match. Lately, I’ve been reconsidering that position.
I ran across the Early Retirement Savings chart again while perusing other PF articles. I even wrote about it here. The more I looked at the numbers, the more I realized that the longer I put off retirement savings, the older I will be before I can reach financial freedom (working retirement).
You can recover lost money, but you can’t get back lost time, so I need to get back in the game. I’ve been conflicted for forever about how to balance retirement savings and debt payoff.
Articles in the personal finance sphere say different things. Some say pay off all debt first because it reduces risk and provides a big psychological boost. Others say prioritize retirement savings to take advantage of compounding interest over time or to catch up with your savings if you are already older. Yet others recommend simply allocating money 50/50 or some other combination. FS-DAIR recommends setting your priority as a function of interest rate. How confusing. There is no wonder why there are so many articles about this.
Of course, everyone’s situation is different, hence my endeavor to find the solution that is best for me. I’m not in my 20s with $18,000 of student loan debt. I’m in my 40s with $97,000+ of student loan debt. I’m woefully behind in my retirement savings. I have a little north of $40k, when a person my age should have hundreds of thousands saved already.
The Center for Retirement Research at Boston College estimates that workers who start saving at age 25 need to set aside 15% of their annual income throughout their career to accumulate enough for retirement, while those who start when they’re 45 need to save 44% of their annual income going forward to save the same amount. (Learnvest – An Easy Way to Get Started with Retirement Saving)
Yeah, that will pretty much be my life for as long as I can work. It feels like these shackles will never come off.
With no savings at 45, you’ll need to accumulate $1,698 in your portfolio every month to meet this goal. If you have $50,000 set aside for retirement, your monthly contribution will be only $1,298. With $100,000, a 45 year old can likely start retirement with $1 million by saving $861 per month. (Consumerism Commentary – How to Save a Million Dollars at Any Age)
This second quote looks more palatable at first glance, except that there are two assumptions therein that I can’t bank on…
Take Care with Assumptions
First, most retirement planners and even the two quotes above assume we want and need 1 million dollars. Do I? Do you? If you are married with a close family network, live simply and don’t foresee any serious illnesses in your future, you may do well on less. If you foresee a high risk of serious illness (see nursing home costs!) or other obligations, you may need more. Visit Mr. Money Mustache’s site to learn more about retiring on less than a million dollars.
Second, we can’t assume we’ll be able to work at maximum salary until 65 or beyond! I remember when I was at my old job, we had a retirement savings rep come by to speak with us individually. One of the few things I remember about that conversation is asking what the minimum contribution was and blithely telling her when she asked when I planned to retire, “Oh, until 70! Forever!’ I may have said that I didn’t expect to be able to retire. Oh, how times have changed! Five years later, I have a more realistic vision of retirement planning. We don’t always choose when we retire anymore. Sometimes it’s foisted upon us.
Moreover, long life and health is not guaranteed to any of us. I know of two people who fell seriously ill immediately after retiring in their 60s/70s. They were expecting a full healthy retirement of travel and leisure, but instead were hit with a major medical diagnosis. One died within a year. The other is almost home bound and can’t easily travel anymore.
A while ago, I read a great piece from the LA Times called Too Poor To Retire And Too Young To Die. Its profile included a ‘Gray Nomad’, a woman who lives in her old RV, driving from temporary gig to temporary gig, who lives precariously close to the edge financially. When reading this I felt worried for her. What happens when her health fails? What happens when that RV breaks down for good? Yikes. It could happen to anyone, especially nowadays in the post pension era, with so many of us having so little saved. With the looming likelihood of no spouse and children of my own I can’t help but wonder… What will happen to me?
Stay tuned for Part 2 (my next post) where I share what my retirement goals are (broadly at least) and what shifts I’m trying in my spending to get me closer to them.
“Debtor’s prison is real, and opportunity cost is a bitch.” (DDSW) [All posts on one page]