If you’re finding it difficult to make retirement planning a priority, you’re not alone. Meeting your current financial obligations—such as rent or mortgage payments, recurring monthly expenses, and debt or interest repayments—can be challenging enough without having to think about the long-term future as well. Given how great this pressure from immediate financial demands can be, it’s perhaps not surprising that 42 percent of Americans say they have no retirement savings at all, as revealed in a 2018 report from the Center for Financial Services Innovation.
However, while this figure may not be surprising, it is certainly concerning. For people in the workforce today, retirement planning is more important than ever, and the longer you delay taking action about it, the more potentially serious the future financial consequences can be. Although you may think that you can’t afford to save for retirement, the simple truth is that you can’t afford not to. Here are five reasons why.
1. You may live longer than you think you will.
Did you know that the life expectancy for the average American is now close to 80? As a result of healthier lifestyles, medical advances, and many other factors, people all around the world are living longer than ever before. From a retirement planning perspective, this means that it’s important not to underestimate the number of post-retirement years you might have ahead of you. Even if you’re thinking about working past the traditional retirement age of 65, there could still be many years (or even decades!) where you’ll need a nonwork-based source of income.
2. You may not get to decide when you retire.
Of course, even if you’re planning to keep working after you turn 65, the fact is that the timing of your retirement may not be something you have control over. According to data from the Retirement Confidence Survey (RCS), an annual survey of working-age and retired Americans led by the Employee Benefit Research Institute, there is a significant gap between the age at which most workers think they will retire and the age at which they actually leave the workforce.
Specifically, it’s quite common for workers to retire earlier than planned. As reported in the 2020 RCS, 31 percent of workers said they planned to retire at or after age 70, but only 6 percent of retirees had retired in that age range. Similarly, only 11 percent of workers said they planned to retire before the age of 60, but 33 percent of retirees reported that they had retired that early. For many respondents, their early retirement was due to issues such as health problems or disabilities (35 percent) or to changes at their company (35 percent). As an individual worker, neither of these scenarios is usually within your control.
3. You may have underestimated future medical costs.
When thinking about your retired life, the age at which it starts isn’t the only thing that might be out of your hands. While many working people assume that they’ll be able to remain healthy and fit throughout their golden years, the reality doesn’t always work out that way, and, unfortunately, unexpected medical bills can have a serious financial impact on someone without a solid retirement plan. Furthermore, even seniors who do enjoy good health during their retirement usually face far higher healthcare costs than they imagine. As reported in a 2018 article from The Motley Fool, the average 65-year-old man and woman will need to spend $189,687 and $214,565, respectively, to cover medical care in retirement, not including long-term care costs.
4. Your expenses may not decrease in retirement.
Healthcare expenses aside, many retirees are also surprised to find that their other expenses don’t decrease as much as they expected—if at all—after they retire. Many basic expenses, such as food, personal care, utilities, and car payments, simply remain the same. Other expenses may decrease, but they can be offset by additional costs. For example, if you own your home, you may have your mortgage paid off by the time you retire, but your (older) home may now require costly repairs and renovations.
Finally, the expense category that may increase the most, depending on your vision for your retirement, is leisure. If you’re planning to travel or enjoy more entertainment opportunities than you did while you were working, you may find you need a higher income to support this lifestyle.
5. Social Security alone isn’t sufficient.
Many workers assume that they don’t need to put aside independent savings for retirement because Social Security will provide them with the income they need. However, while Social Security is indeed an important source of retirement income, it shouldn’t be—and was never intended to be—the only source. For most people, Social Security will fall far short of the income needed to meet basic expenses in retirement, let alone pursue travel or other leisure opportunities. As an example, if you’re a 30-year-old currently earning an annual salary of $50,000, at the age of 67, you would receive less than $22,000 per year (in today’s dollars) in Social Security payments.