It can be easy to forget about the importance of saving up for retirement when it’s still decades away. This is especially true now that the retirement landscape is changing; the days of retiring at age 65 are becoming a thing of the past. Now that our life expectancies are increasing, people are able to work well into their seventies, and working from home is becoming more commonplace, we’re starting to rethink the best ways to save for retirement.
Part of this planning involves understanding how certain life decisions can affect your retirement savings. Here are a few personal choices that most people make during their lifetimes, and how they can influence your retirement savings decisions.
Building a Family
Without major reform, Social Security benefits will need to be cut by 23% in 2033. This means that you need to plan ahead to make sure you have enough money to retire comfortably without relying on Social Security checks. A significant part of this plan involves when (or if) you get married or have children.
Due to the skyrocketing costs of weddings nowadays, spending a significant amount of your earnings on a wedding and other big-ticket items generally causes you to have to retire later than people who save that money for retirement instead. Furthermore, if you don’t fix your credit, you run the risk of scrambling to pay off debts instead of funneling that money towards retirement.
Furthermore, especially for people with lower levels of income, having kids is often one of the biggest factors affecting retirement savings. For instance, if you have a child closer to middle age, it’s likely that you’ll need to work longer and cut back on retirement savings a bit to cover the child’s living – and, often, college – expenses.
On the other hand, if you finish having kids in your 20s or early 30s, you’ll often finish footing the bill for them by the time you reach middle age. The combination of higher earning power due to experience and no longer supporting your children equates to accumulating more money for retirement.
A couple that retires at age 65 today can expect to spend about $245,000 on healthcare throughout retirement, making it especially important to be conscious of your decisions surrounding healthcare when planning for retirement.
Now that fewer employers are offering retirement health care benefits and health care costs are rapidly increasing, it’s becoming more important to think about what you want to do regarding catastrophic health care and long-term care costs when you retire. Once you’re no longer working, it’s likely that you’ll face increased costs for medical insurance coverage – despite Medicare. Because of this, consider buying supplemental Medigap insurance to pay Medicare deductibles and copayments, as well as to protect yourself against emergency health expenses.
You should also consider planning for retirement-age long-term care. You may need long-term care when physical or mental disabilities impair your ability to manage basic, everyday tasks. Unfortunately, this type of care can be expensive, especially as people are starting to live longer. Consider purchasing long-term care insurance to help offset this and factor it into your retirement income needs.
High and Low Risk Investments
Different types of retirement investments carry different risks, so it’s imperative to understand those risks and how they can affect your retirement income to best set yourself up for a comfortable retirement. This is especially true considering that men have a 78% chance of living to the age of 75 and women have an 85% chance, as the decisions you make about investment risk now can affect your life for possibly decades after you retire.
Basically, investment risk is derived from fluctuations in the market that can result in depletion of your retirement savings. You can generally assume that market fluctuations will average out over time, but it’s important to consider how much time you have to save up.
Low risk investments provide lower returns and higher risk ones provide higher returns, so it can be tempting to put a lot of your retirement money into a high-risk investment. However, since the market doesn’t always provide positive returns and can provide negative returns for a few years at a time, it’s important to avoid high-risk investments when you’re close to retirement age. When you’re younger, you can afford the lulls associated with high-risk investing since there’s time to recoup losses. As you reach retirement age, it’s often a better strategy to have a mix of low- and high-risk investments to keep you comfortable.
Thinking about saving up for retirement may not be the most glamorous use of your time, but it will certainly pay off in the future. By paying attention to your life choices now, you can set yourself up for maximum comfort as you age.
What are some other important factors to consider regarding retirement savings?