Should 20-25 year olds financially plan for retirement at age 40-50, even if they do not want to retire at age 40-50?
Seems that around that age, after around 20-30 years in the labor market, there are significant risks of being forced to retire long before reaching what is considered “normal retirement age”, or having to take a substantially lower income:
A. Age discrimination.
B. Obsolescence of the type of job one does.
C. Physical jobs may become more difficult to do if one does not take care to maintain physical fitness (a physical job may help in maintaining physical fitness, but by itself may not be sufficient).
D. If one has been working up the job/pay ladder, where there are fewer job openings, it may be difficult to find an equivalent job after being dismissed, so getting another job may require taking one with substantially lower pay.
E. If changing careers, need money to live while retraining and pay retraining costs, and likely will have substantially lower income, at least at the start of the new career.
Of course, if your career lasts until “normal retirement age”, with a stable or upward trend in income, then consider that a bonus. But many people’s careers involuntarily end early, and/or their incomes head downward involuntarily. Those who are financially able to retire at that time will not have the personal finance panic that those who have not saved for early retirement will have.
Our son is planning just that. He wants to be financially independent in his 40s/early 50s so he can pursue his own interests the rest of his life without being tied to either the military (where he is currently contractually obligated until he is 31) or any corporation. At 22, he is well set up to reach his goal based on his own discipline and wealth building plan but, given that he is an only child and his parents are in their 60s, he will most likely get an additional boost from whatever we leave behind even though our retirement spending plan doesn’t include leaving him an inheritance. All his life, he has watched us make retirement and financial independence our top priorities, and we have taught him to do the same. He knows that there are many things over which he has no control, so preparing early for financial stability is a sane strategy for withstanding the inevitable slings and arrows of outrageous fortune.
I believe that planning for and working toward financial security (call it what you may) should be an important objective for everyone, not just 20-25 year olds. Obviously, the earlier one starts, the better the chance for success.
Yes, they should save if they possibly can. Both short term and long term savings are important. Stuff happens when you need more than what tightening the belt can yield, so an emergency fund can be essential. Those without 401ks , HSAs at work, might want to think about Roth or regular IRAS and maybe a HSA.
Yes, but most won’t. It’s too hard to envision that age for themselves. So, we just really stress putting the most he can in his 401k right from Day 1. He only does 10%, but it’s better than what we did. We didn’t even start saving until we were 30.
Absolutely. I deal with 40-50 yr olds all the time (professionals). Amazing the financial difference between those who planned and were systematic about it vs. the rest. A lot of it also relates to how they handle debt.
What most haven’t figured out is you can still live a very high quality life by living beneath your means on a day to day basis (certainly take the nice family trips, have a nice home, etc. but don’t just blow throw cash on unimportant stuff). The ones who are “responsible” tend to live well AND have a nice overall investment portfolio with little debt .
That’s important as they are able to be far more in control of their circumstances later in life. Currently working with a 55 yr old who just got laid off after 30 yrs. He MAY go do something but he DOESN’T NEED to because he PLANNED from an early age.
Sounds good but it is very hard. My counselor said that she doesn’t think she has a single client under the age of 45 who is without college debt! Ack.
Yes. The FIRE movement is focused on the concept of retiring early, though not necessarily ceasing all work activities early.
My son hasn’t started college yet, and he’s already planning on retiring early. Not simply wishing to retire early, but thinking the process through, from college, to grad school, to 15 years of gainful employment, to checking out of the rat race in his late 30s-early 40s. Will that happen? Who knows. At his age, I planned on my older self living in a self-designed Wright-inspired house with 5 kids running around the house. That never happened.
Regardless of external forces (age discrimination, physical jobs being too much to endure, etc) I think today’s young adults would do well to plan to save as much as possible and to create multiple income streams. With proper planning and execution, “retiring” in the 40-50 range is very possible at most every income level. The key is spending below one’s means, investing wisely, and preparing for a “retirement” style that matches the means.
I think it’s smart to plan to be financially independent, but the thought of retiring that young never appealed to me. It seems as if the people who work longer do better. My dad worked full-time as a professor until he was 79. DH is 65 and has no plans of slowing down any time soon.
I definitely think they should shoot for it. I stress with my kids all the time the importance of long-term savings. However, to really PLAN for it, they would need more help than I could give them because despite saving a lot more than most people I know (as a percentage of income), I would still be hurting if I lost my job today (I’m 50). I have something like 10-12X my annual income in retirement accounts, but it’s mostly inaccessible yet. At least as long as the reason for losing my job wasn’t a health problem, I could get any low paying job and be able to pay the bills and wouldn’t have to worry about saving more for retirement. There’s just that pesky problem of having to pay for family health insurance without it being heavily subsidized by an employer.
I don’t think most that retire early plan on doing “nothing”, just having more options for what they do. For example, my aunt and uncle retired early from crazy careers to run a small family farm open to the public part of the year that has things like corn mazes, pumpkin picking, mini-golf…stuff like that. Spring and Summer are spent getting the place ready, Fall is their big working season and Winter they just leave the cold Midwest and travel.
But seriously, life has a way of throwing curveballs. And everything before that age has to go perfectly. Including the right career choice that includes even being able to save much more than average, having parents who can pay for college or being smart enough to have the ability to have scholarships to pay for college. Being employed for all of those years at a high level. Maybe no children or one child. Being able to even buy an affordable home and having the home value increase.
Geez, sometimes CC astounds me. Maybe all of our kids should be engineers, investment bankers, startup entrepreneurs. Where everyone is above average and makes good choices? Where everything goes according to plan. Don’t even be a physician, you won’t even start earning enough money to pay down your debt until your 30’s. Or an attorney, or physical therapist or any job really that delays savings.
And don’t even talk about saving for a wedding or house down payment.
^A couple of years ago, I visited a wealthy couple in North Carolina. They have a beautiful house on the lake. They retired in their 50s. I asked them what they do with their time. “Well, we go to spin classes…” No volunteer work or much of anything at all. Traveling a few times a year was about it. We sat around most of the weekend. It was so odd.
When we were in our 30s, friends pitched Amway to us. The WHOLE spiel was, “You can retire early!” We told them we had no intention of doing that.
So your aunt and uncle didn’t really retire, they just changed jobs, right? I don’t consider that retiring.
Having said all that, I know I’m fortunate. DH and I run our firm out of our house. He is busy full-time, but I’m part-time and flexible. I can take off on day trips pretty much whenever I like. I can go to Texas to see family. We head up to our cabin regularly. It’s worked out well for us.
I don’t know that the goal should necessarily be to retire at 40 either. My D LOVES his job and can’t imagine ever retiring. He could see shifting to a consulting role to have more travel/vacation time but work is energizing for him. I’d love to have everyone feel that way about their careers instead of trying to find ways to minimize the work years.
That said, I think everyone needs to start saving for retirement from day one. Max out 401 K contributions, and put 1/3 of the income into other investments. Definitely the live below your means is critical.
I think the full retirement age for folks will continue to rise.
Absolutely, young workers should contribute to retirement savings ASAP. These are long term investments that will hopefully pay off when they are ready to retire…whenever that is.
When the person gets closer to thinking about retirement, they can then crunch the numbers to determine when retirement is feasible for them.
Yes, there are folks retiring at age 40. That would mean about 20 or so years in the workforce…and probably 40 years in retirement. With costs increasing for day to day things…and health care, and potential long term care, that’s a LOT of years.
Really interesting question
Nice goal to have. We started a small retirement account for both our kids several years ago. If they do nothing they should have something like $64,000 at age 65. So the idea was that when they start working they will contribute to this account. We had both kids talk to our broker dude with Merrill Lynch when they turned 18 about what the future looks like and what they should consider doing. When my daughter graduates college next year I want her to have another sit down with him. Both kids have a huge advantages since they will have little to no loans if we can help it. Her income level won’t be close to my son’s when he comes out of engineering school. He is frugal and most likely will save everything to meet this goal.
I am more concerned about my daughter since her income won’t support her being able to make this goal. I just hope she has enough to retire on at 65…
Great @ucbalumnus… Just as I was stopping to worry about my kids something new to think about… Lol ?.. Thanks… Lol
It’s more like they make money on the side living a lifestyle they love. Most people fresh out of college couldn’t just go buy a 50 acre hobby farm and make enough off of it to survive.