In honor of Father’s Day I thought I’d take a look at the experience of a lot of our dads out there when they entered retirement: they got a pension. Because the millennial generation is less likely to work for the same employer for the duration of a career, less likely to be unionized, and our pension funds are not very well funded, anyone who wants to retire someday must look to a different source of income. The typical work for 30 years and draw a monthly payment for an amount close what you used to make while working is no longer a reality for most people.
What then is going to take care of us when we are old? How are we going to be able to sit back and relax on the beach in South Florida and drive around old folks communities in golf carts when we won’t have the same security our parents had in retirement? The answer is we will either have to save a lot more than they did or we’ll have to be ok with working part time and taking Social Security much later than most people.
If you are in your twenties or thirties you probably haven’t thought about Social Security, aka America’s last ditch you didn’t save enough yourself national pension program. You are eligible for 75% of your Social Security payment at 62 for the rest of your life and then the full amount at 66. Each year you wait past 66 you get a 8% higher annual payout so quick summary is without putting a lot of money in a 401k you’ll be waiting til 70 to stop working.
Employers typically contribute between 4 and 6% of your pay to a 401k in lieu of a pension payment. You need to put in at least as much as your employer does or you’re leaving free money on the table, and nobody lets $20 bills lay around in the street and neither should you. Realistically, if you want to be able to sip mojitos on a beach by your 60th birthday you should put at least 10% of your pay into the 401k at work. If you are young you want to make sure your investments have a high amount in stocks as those return the best over long periods of time.
So this weekend as you hug your dad, envy his pension if he has one because they aren’t going to be making them much anymore. Our national pension, Social Security, will undoubtedly look really different by the time we get there as it’s underfunded so the retirement age should be heading higher. Place 10% of your pay in a 401k and you’ll have a nice nest egg in 30 years if you are headed down the traditional retirement journey. The difference between an extreme early retiree and a traditional one is you’ll make much heavier use of non-retirement accounts so you can save enough to generate portfolio income to replace your work income. Many have asked for a breakdown of the math behind early retirement, and I’ll be elaborating soon.
Again, Happy Father’s Day! Thanks to mine for teaching me how to be frugal!
I LOVE this! My uncle is the owner of a big bank in GA and was telling me exactly the same thing. Start 401K yearly–especially because it’s tax deferred.