The Importance of Retirement Planning: Reasons to Start Right Now
Good financial stewardship involves paying off debt and saving for the future, the latter of which is especially important considering the average retirement age in the United States is 65 and 63 for men and women, respectively. Considering life expectancy is rising, this leaves many Americans with several decades of no income outside of Social Security benefits. Having a nest egg of at least $1 million can help individuals live a more comfortable post-retirement life, although some financial experts suggest saving $2 million because of changes to age demographics and cost of living.
While it's best to start saving for retirement as soon as possible, that's not always a feasible option. A 2019 Morning Consult report noted that only 39 percent of American adults saving for retirement started in their 20s, while 15 percent didn't start until they were in their 40s.
Here's why, regardless of age, you need to start planning for retirement right now.
You Can't Work Forever
This isn't a major revelation, but some people take so much pride in their work that they might prefer to work until the day they die. While this might be easier in some industries compared to others, it's not at all a legitimate retirement planning option. You're going to slow down as you age and otherwise common tasks will become more difficult.
Moreover, your golden years should be a time for relaxing and experiencing the joys of life. This includes traveling and other leisure activities. This is much easier to do if you can comfortably retire at a reasonable age instead of continuing to work because you don't have adequate savings.
Better Health Right Now
Health care is a major expense in retirement and it's important to plan accordingly. According to Fidelity, the average couple in the US will need nearly $300,000 to cover post-retirement medical expenses. However, the simple act of planning for retirement can help improve your immediate health and potentially mitigate the amount you may need to spend in retirement.
More than 70 percent of American adults stress about their financial situation, according to the American Psychiatric Association. This can contribute to adverse physical conditions, including migraine headaches, heart disease, and diabetes. Financial stress is also linked to depression and anxiety. By planning—and setting aside money—for retirement, you can avoid stressing as much about your future financial situation and mitigate current health risks.
Life Expectancy is Rising
Average life expectancy in the US was 70.78 in 1970, so it wouldn't have been reasonable for most people to expect to live until they're 90 years old. Workers nearing retirement around that time would have needed substantially less money to secure a comfortable retirement. However, average life expectancy is up nearly 10 years to 79.05 as of 2022. This, combined with inflation, makes retirement planning more important than ever.
Lower Taxable Income
Better health and lower stress levels aren't the only immediate benefits to starting retirement planning as soon as possible. You can also pay less in taxes right now by contributing to an employer-sponsored 401(k) or Individual Retirement Account (IRA). You can deduct as much as $7,000 from your taxable income in IRA contributions in 2022. The 2022 contribution limit for 401k and 403B plans is 27,000, if you are 50 or over. It's possible to further lower your taxable income and diversify your post-retirement income sources by also contributing to a Roth IRA, Back-Door Roth IRA, or Mega-Back Door Roth IRA.
You can also deduct from some IRAs while you're still working without incurring tax penalties. This is possible for individuals who make less than $78,000 and don't have an employer-sponsored 401(k) plan.
"Many people are eligible to deduct their traditional IRA contributions, which can help reduce their tax liability," notes Betterment Certified Financial Planner Corbin Blackwell. "Not all IRA contributions are tax deductible, however, so be sure to work with your tax preparer to understand your situation."
Future Financial Obstacles
Even with a sound retirement plan, there's a chance you might run into some unforeseen circumstances in which you have to pay a substantial amount of money. Healthcare costs in retirement can be hundreds of thousands of dollars, including long-term care. You might also run into surprise expenses like health insurance, home renovations, and increased state and federal taxes. The more money you have saved, the more prepared—and comfortable—you'll be to manage these expenses.
Your Bucket List
Retirement shouldn't be a time to worry about money; instead, it should be a period when you can enjoy all that life has to offer without financial stress. Likely, your kids are grown up and you have plenty of free time to travel the world and explore new destinations. You might have had to avoid taking that dream destination trip during your working career or held back on spending money for other luxuries, but you should be able to reap the rewards of your saving strategy in retirement.