Most people have good intentions about saving for retirement. But according to recent studies, only a small percentage of them put those good intentions into practice.
For many people, saving for retirement takes a back seat to keeping up with the day-to-day cost of living. Retirement, especially if it’s “out there” 20 years from now, becomes something we promise ourselves we’ll deal with down the road when we have more time and money. But is that really a good idea?
Let’s look at two physicians, Drs. Smith and Jones. They are equal partners in a medical practice. Both are 45 years old and both plan to retire at age 65. Their financial advisor has suggested that they increase the amount of money they are saving each month if they want to be able to maintain their lifestyle during retirement.
Both agree with this recommendation and agree to begin saving more, but each takes a different approach. Dr. Smith begins saving $275 a month immediately, and she does so for a 10-year period. Dr. Jones, on the other hand, waits 10 years before starting to save, at which time he, too, saves $275 a month for 10 years. For the purposes of this discussion, we will assume that both doctors earn a flat 8 percent rate of interest on their savings.
It is now 20 years later. Both doctors are 65 and both have put away a total of $33,000. Dr. Jones, the procrastinator, has earned $14,804 in interest for a total of $47,805 in savings. Dr. Smith, the early starter, has earned over $70,000 in interest for a total of $103,208 - more than twice what Dr. Jones has accumulated with the same initial investment.
(Note: this example does not consider inflation or taxes and does not represent any particular savings vehicle. It is not representative of past or future performance.)
So what does this tell us? Not only is it wise to set money aside for the future, but those who start saving sooner can take advantage of the power of compounding, giving their money more time to accumulate interest. (They may also be able to retire sooner.)
If you have trouble saving money on a regular basis, there are a number of strategies you can try that may help make it easier. One strategy is whole life insurance, which, in addition to providing valuable survivorship protection for your family or practice, builds cash values that grow income tax-deferred. If you die prematurely, the life insurance completes your savings program. If you live to retirement, you can access your cash values to supplement retirement income.
(Note: accessing cash values may result in surrender fees and charges, may require additional premium payments to maintain coverage, may reduce benefits, and will result in a reduction of policy values.)
Other strategies include taking advantage of employer-sponsored retirement plans such as 401(k) or Simplified Employee Pension Plans (SEPs), as well as using payroll deductions or automatic bank drafts to funnel money into the savings vehicle of your choice. Setting money aside in this manner is both steady and convenient, and it essentially allows you to pay yourself before you pay your creditors.
If you have been putting off saving for retirement until “sometime down the road,” do yourself and your loved ones a favor: Take the time today. When the time comes for retirement, you will be very glad you did.
This material has been prepared by Penn Mutual and should not be considered specific financial, tax or legal advice.
© 2019 The Penn Mutual Life Insurance Company, Philadelphia, PA 19172