Financial Planning for Retirement: Never Too Early!

12 Sep

During the summer, I participated in “Love in Seoul,” a local community service club that helped the elderly who needed financial support after retirement. In this organization, I had a chance to chat with these individuals and I was rather surprised–many of them were college graduates and some had once worked in one of the top companies in Korea, such as Samsung. I wondered, “So… what happened?”

Life expectancy in the U.S. has been increasing every year and is now about 79 years. Unlike previous generations, who only had to worry about five to ten years after their retirement, people now need to think about how to finance 20 to 30 years of their life upon retirement. Henceforth, people will need to have saved LOTS of money before they make their ways to retirement, and pension funds alone will never be enough.

Financial planning for retirement is an important investment decision for all of us. However, most people choose to overlook this, because they often feel retirement is too far into their future and not a current problem to consider. This applies especially to college students, like myself, who would respond, “I just celebrated my 20th birthday. Retirement? I still have a good 40 years ahead of me. I have time.” Um…no, guys. We are late!

Why Early?

To understand why investing earlier for retirement is better, let’s compare two individuals, X and Y, and their retirement plans with an Individual Retirement Account (IRA) with 9% interest.

  • Person X – invests $2000 annually from the age of 22 for the next nine years and does not invest any more money from 31 years of age. By 65, X has $579,471; the total amount of actual investment that A made is $18,000 ($2000 p/y for 9 years).
  • Person Y – makes annual investments of $2000 at the same IRA but starts later at 31 years of age until 65. Even though Y has invested more money for a longer period of time ($2000 p/y for 35 years = $70,000), only $470,249 is available at the age of 65. 

 (The image and the data sets are taken from http://stacienaczelnik.hubpages.com/hub/Why-You-Should-Start-Saving-for-Retirement-Now)

What Can We Learn From This?

The earlier, the better. Do not forget the time value of money principle: a dollar today is worth more than a dollar tomorrow. We are young, but the truth is that we will grow old and soon face retirement. Before that time approaches, we need to have saved enough money, so we can spend our remaining lives not living under cardboard boxes eating canned foods but with happiness.

So when is the time to start planning for retirement? The answer is now.

by Hyun Wook Shin

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