Is there a magic age before which it’s too early to start saving for retirement? Could there be an age after which it’s not even worth bothering? What’s the ideal age to start?
These questions tend to occur to us more the older we get. Often, we only start paying serious attention to retirement when we’re past the half-way point in our working lives. Suddenly the prospect starts to seem more real.
Confronting Mortality
It’s human nature for young people to view growing old as something exceedingly far off. Many millennials are aware that the state retirement age is gradually getting later and later. As a result, many assume that retirement is not even worth thinking about. It can also be uncomfortable to contemplate a time when we’re no longer young. Many think that the only kind of retirement worth enjoying is an early retirement. Saving for a distant retirement seems a waste of money.
As we grow older though, we can more easily imagine ourselves at retirement age. So the prospect of retirement becomes less scary and more real.
Logic Versus Emotion
Our emotional aversion to the thought of reaching retirement age can make us less rational. A useful early step in retirement planning can be to recognise and work past that aversion. Doing so opens up a new way of thinking about life. Instead of feeling that you have to cram all of life’s enjoyment into your youth, you begin to see life as a continuing journey. You can then start applying more logical principles to planning your future finances.
Establishing Your Lifestyle
There’s no hard and fast rule for everybody. The younger you are, the more major lifestyle changes other than retirement you’re likely to have ahead of you. Here are some examples:
- Leaving home
- Building a career
- Having children
- Buying a home
- Buying a nice car
During the early stages of your working life, it’s perfectly reasonable to prioritise these goals. At this stage, many people focus on establishing their standard of living rather than maintaining it. That’s not to say that you should completely ignore retirement. It can be beneficial to understand what pension contributions your employer offers, including any matching arrangements. This is free money, even if you need to make matching contributions.
Also, over‑borrowing can create difficulties later, particularly if income is interrupted or interest rates rise. If your income is interrupted, you may be unable to keep up with interest payments. Also, increases in interest rates may cause you problems. With interest rates at historic lows, future increases are a possibility that many people consider.
Achieving Your Lifestyle
Sadly, not everyone will have the means to achieve the lifestyle they really want. As I mentioned, over-borrowing will likely lead to big problems later. It can be helpful to understand your own baseline standard of living. By this I mean the basic necessities of life, including paying for things like you home, car, children, day-to-day living expenses, and insurance. The question then becomes: how much room is there for discretionary spending?
If you’re a natural saver, you’ll probably use much of your disposable income to pay down your debts and save for retirement. If you’re not so good at saving, you might end up spending all of your disposable income on luxuries.
It’s at this stage in life, when significant disposable income becomes available, that many people start to save more seriously for retirement. If you don’t think you’ll ever have enough disposable income, one consideration could be to make cutbacks to current expenses to create room for retirement saving.
How Much Saving?
Rather than fix an arbitrary level of savings (for example 10% of your income), a useful approach is to explore what level of spending appears sustainable over time. By sustainable, I mean a level that can be maintained year after year, adjusted for inflation. By definition, anything you don’t spend, you save. This is the philosophy at the heart of our Intelligent Financial Planning Calculator. Uniquely among financial calculators, it can model levels of spending that appear sustainable based on your circumstances.