Retirement saving is hard. Why should I save when I can spend my money now? I can use the money to buy new clothes, tickets to shows, eat out, and many other fun things. There are many practical and emotional reasons why we should opt for delayed gratification and squirrel a portion of our paycheck away in 401(k) and other retirement accounts. If you think saving is tough now, just think how much harder it will be when you're 65 years old. Here's why saving for retirement is becoming increasingly important:
Pensions. The traditional pension plan is disappearing quickly. If you work in the private sector, it is likely that your employer no longer offers a pension plan. We are living longer and it is difficult for a traditional pension plan to support the long years of retirement and increasing health care costs. Many companies are freezing their pension plans and new employees are increasingly no longer eligible for that benefit. Pension plans are more common in the public sector, but we can see cracks there as well. Many plans are being reworked and made less generous. Perhaps they will start to become rare in the public sector as well.
Social Security. This week the Social Security Board of Trustees announced that the Social Security trust funds will be exhausted in 2033, which is three years earlier than the last projection. This means, in 2033, a retiree will receive only about 75 percent of the Social Security payout they have earned unless changes are made to the system. The slow economy and retiring boomers are taking a big toll on Social Security.
Personal savings. Retirees will become increasingly reliant on their own savings and investments. Talk to your older relatives to see how they are coping with retirement expenses. One of my grandmothers lived in her own home and she was able to take care of her own bills. She lived an independent lifestyle and was able to afford a spot in an assisted living facility when she needed it. She and her husband saved diligently for retirement and they were able to enjoy it.
Some of my other relatives didn't save as much, and they had to make some sacrifices in their retirement. One grandmother moved in with her son and wasn't able to travel or spend much money. Multigenerational households are on the rise and one in six Americans is now living with their extended family. Moving in with family members might become a necessity for retirees without pensions and with reduced Social Security payments. But I'd rather be independent for as long as I can. Saving for retirement means putting off some purchases now, but later on in life I can have more freedom and independence. I think that's worth the deferred gratification.
Joe Udo is planning an exit strategy from his corporate job by reducing expenses and increasing passive income. He blogs about his journey to early retirement at Retire by 40.