When I'm 64

"Would you still need me, would you still feed me, when I'm 64?"- The Beatles

Ok, so the real title for this article is "Retirement Planning: A Five Part Series", something so boring only a personal finance nerd like me would ever even open it up. But I think it's important to first take a minute to recap WHY you need to even think about retirement planning. You are young and you are just now working your way into your dream career (or figuring out which career that even is). Why should you plan now for something so distant as retirement?

Which is why I refer back to the Beatles "When I'm 64". Paul McCartney was 24 when the Beatles recorded his satire of growing old with your love. Do you think he was anticipating that the day would ever come? Ask your parents, and they will be the first to tell you how quickly time flies (like you really want to open that can of worms). The life expectancy of a 30-year-old man is 77, and 81 for a 30-year-old woman. So chances are, you will see and pass the "normal" retirement age of 65. Will you still be working? Will it be your choice or will you be financially chained to your job? The goal of retirement planning is not to set it and count down to when you can watch re-runs of Jeopardy all day, it is to ensure you have the financial freedom to do what YOU want to do, when you are still able to do it.

I have a lot of friends who do not believe in retirement. Their attitude is, "I'll never have enough money to retire and will have to work my whole life anyway, so why save?". These people will save in their 401(k)s up to the company match, and then cash it out when they switch jobs. Or they don't plan to stop working because they enjoy it, or perhaps are business owners who reinvest every spare dollar back into their business. The problem with the "work-until-you-drop-dead" retirement plan is that your job may not be there for you anymore, or your business could fail and leave you with nothing. Harsh, I know, but the reality is that unemployed Americans over 55 have been the least likely to find another job during this recession, and the most likely to take a significant pay cut (15% versus 5% for those under 55). Many are forced into an early retirement. So even if you plan to continue to work, you may not have the option. A better strategy? Save money for retirement that you can deploy at normal retirement age, and choose to defer retirement if you are willing and able at that time.

An important reason for starting your retirement savings now (versus five years to retirement) is the power of compound interest. "Compound interest is the greatest invention of mankind" is a quote attributed to Einstein, and I have yet to meet a financial professional who disagrees. This would make negative compound interest the worst invention of mankind, but I will leave that to a future post on debt.

Compound interest is earning interest on the interest you've already accumulated. Imagine you invest $1,000 at a 6% annual rate, compounding monthly. At the end of month 1, you will have earned $5 ($1,000 x [6%/12]). At the end of the second month, you will earn another $5 from the principal, and in addition you will receive 2.5 cents of interest from the $5 of interest earned last month. Literally pennies, right? But it starts to add up. At the end of the year you will have earned $61.68 in interest as a result of the compounding, versus $60 if you only earned interest on the original investment of $1,000. The compounding continues, and at the end of 10 years you would have earned $819.40, or $219.40 more than the $600 earned from the principal alone.

Now apply the magic of compound interest to retirement savings. Let's say you actually listened to your parents/ mentor/ college finance professor and started saving $150 a month for retirement at age 22. By the normal retirement age of 65, you would have $363,377 in your retirement account (assuming a 6% return) and have only put away $77,400. Now imagine you did not actually listen to afore-mentioned advice-giver and don't start saving until age 42. You would have to put away $613.55 a month to match the $363,377 in retirement savings, a total contribution of $169,340. In other words, you save twice as much of your own money but end up with the same final amount.

Reality check- most likely you will not be able to retire with only $363k in your retirement account unless you have a government pension or a really flush trust fund. It takes a lot of money to retire. Once you make it to 65, a man has a 30% probability and a woman a 40% chance of living to 90. That is 25 years of supporting yourself on your retirement savings! Assuming the traditional retirement distribution rate of 4%, $363k provides you an income stream of $14,520 a year, which is below the poverty line for a household of two. The fact of the matter is that most of us will require at least $1,000,000 to sustain our standard of living through retirement. So start saving NOW, because the sooner you start the more you can take advantage of compound interest!

From a behavioral aspect as well, it is much easier to make a habit of saving now and then slowly increase the amount than it is to start saving a large amount all at once. Needless to say, I am not one who started saving right out of school, or even when I began working for a wealth management company that works directly with retirement savings. I was 26 before I opened a retirement savings account. I began by saving $50 each paycheck and rose it every time I got a raise or paid off some debt. Now I'm up to $375 a paycheck, which is a lot for me (a natural spender) but still not enough to get me to my goals. I understand that I will have to continue raising that amount to meet my retirement lifestyle needs.

Now that I have covered the WHY of saving for retirement, I will spend the next four posts enlightening you as to the HOW:

1. Determining Your Retirement Need
2. Company Retirement Vehicles
3. Individual Retirement Vehicles
4. Retirement Vehicles for Small Businesses and Self-Employed

Try to contain your excitement as you wait in anticipation!