Earlier this month, The New York Times ran an article with the headline “How to Retire in your 30s with $1 Million in the Bank.” I am a blushing 34, so reading this was a dizzying experience. The article explored adherents of the FIRE movement (Financial Independence, Retire Early), which promotes a simple equation for gaining radical financial independence: Spend less than you earn with the goal of speedily achieving a net worth that is 25x more than your annual expenses.
This extreme approach relies on occupying a position of privilege; consequently, much of the FIRE community is made up of white men who cashed in big-city tech salaries to move to smaller towns with a lower cost of living, and who can now tout the joys of life’s simple pleasures. It’s a vision of the future that remains out of reach for most Americans. But retirement is changing: Employer-sponsored pension plans are disappearing, the age at which Social Security becomes available has gone up (from 65 to 67), and the Bureau of Labor Statistics predicts that by 2022, over 30 percent of seniors will still be working. We’re living longer, spending more on health care, and far more of us are self-employed or working in the gig economy.
More bad news? For women, the stats are even worse: Women live an average of six to eight years longer than men, and yet we save two-thirds less. There are countless reasons for this savings gap: Women earn 81 percent less than men, take more frequent career breaks to care for children or aging relatives, and are more often tasked with the more day-to-day financial work of running a household — leaving less time for “big picture” saving. But whatever the cause, the result is the same: “Women are 80 percent more likely than men to be impoverished at age 65 and older, while women between the ages of 75 and 79 are three times more likely than men to be living in poverty,” according to a report by The New York Times.
These statistics are sobering, but there are ways you can start taking control of your financial future. I spoke with Paco de Leon — finance expert and founder of The Hell Yeah Group, a financial firm focused on inspiring creatives to be engaged with their finances — about the changing face of retirement and how to navigate it.
“On the one hand,” says Paco, “I think we are starting to see the limits of our individualistic culture and the painful reality of income inequality; on the other, if you can earn enough money that you can save for a workless future, you’re doing well compared to a lot of the world.”
“Even my ability to retire is a question I don’t have the answer to yet,” Paco says. “What’s important is to figure out who you are and what you value. As you do that, you’ll start to understand where to focus your energy — whether that’s earning a ton of cash or embracing a frugal lifestyle, starting a business or moving to a place where the cost of living is cheap.”
To help you do that, read on for more no-nonsense retirement talk from Paco — and jump into the comments if you have further questions!
When should I start saving for retirement?
General financial wisdom says you should start saving as soon as you start earning. The sooner you start, the longer you’re invested, which means more time for the money to compound and grow.
(Ed note: This is especially true if your employer offers a match program — i.e., they will match the amount of money you save for retirement up to a certain amount. If your employer offers matching and you aren’t taking advantage, stop reading right now and make an appointment with HR to get yourself set up! And don’t underestimate the value of starting early: Just a couple extra years of compound interest can make a sizeable difference in retirement savings.)
How can I balance paying off debt versus saving for retirement?
Everyone’s circumstances are different, so I try to teach people how to think about it critically. Credit card debt and retirement savings work in the same way but in opposite directions. Let me explain:
Credit card debt can grow if you never pay more than the minimum or the interest due. The interest can compound over time, and you can be in debt for years or decades.
Retirement savings get invested. You’ll typically earn dividends and interest from said investments as well as contribute more to your savings. So your balance compounds and grows over time.
Let’s look at an example: Say you have a credit card that costs you 17 percent in interest and a retirement account that’s growing at 6 percent. You should prioritize paying down the credit card because you’ll automatically be saving 17 percent by paying it off sooner. Then once it’s paid off, you can put the amount you were spending paying off debt into your retirement account.
Just remember, when you forgo the contribution to retirement, you’re missing out on compounding and growing your money, so you want to figure out a budget to make sure you have a plan to attack the debt.
What’s the difference between an IRA and a 401(k)?
A 401(k) is a retirement plan that is set up and sponsored by an employer, so only people who are employees (or employers) can participate in a 401(k) plan.
An IRA stands for Individual Retirement Account. If you (or your spouse) earns income and you’re younger than 70 1/2, you can set up and contribute to an IRA.
They are both “forced” savings plans. Forced means that there are laws surrounding how much you can contribute and penalties for taking money out before retirement age (yes, there are exceptions to this). The laws are forcing you to save for the future.
What happens to an employer-sponsored 401(k) when you leave your job, and what should you do if you’re preparing to make a job change?
For most plans, it just chills out and stays where it is. It stays invested, but be careful with fees! There’s a lot of talk these days about how 401(k)s aren’t as effective in compounding because of the administration fees.
For example, if you earn a return of 6 percent for the year, but the fees total 3 percent, you really only earn 3 percent. This makes a big difference over time.
If you don’t rollover the funds right away, you’ll probably eventually get a notice from HR telling you and your money to GTFO.
Before you leave a current job, find out about whether or not the new job has a 401(k) plan and if you can rollover your funds from the old 401(k) into the new one. Make sure you clearly understand your benefits package and when open enrollment is.
(Ed note: In other words, ask lots of questions! Most companies have staff who are there to help you figure this out; if not, they can at least direct you to the help desk of their retirement provider. And don’t be afraid to ask coworkers about their own retirement planning. Find a coworker you trust in a similar income bracket to yours and offer to buy them an after-work drink if they’ll walk you through their own savings plan.)
If I’m self-employed/a student/struggling to make ends meet, how can I start saving?
If you’re self-employed, understand the limits of your revenue with your current resources (your time, your team and how much you can invest in technology). If it’s just you doing hourly work, you should know the limits of your income with your current rate. Can you live your life and save for retirement with that amount of income?
If so, open up an IRA and set up an auto-transfer. Start with $25/week and try to slowly increase it to the maximum contribution ($5,500/year for anyone under 50).
Just remember: Anything helps. Start small. Get into the habit of saving and living within your means right now.
Collage by Louisiana Mei Gelpi.