By Joe Allaria
Learn more about Joe on NerdWallet’s Ask an Advisor
Millennials and Gen Xers may not spend too much time thinking about retirement planning, but recent changes to Social Security highlight just how important it is for them to start now.
Certain strategies that have allowed millions of retirees to increase their benefits will no longer be allowed once the new legislation is phased in over the coming months.
Over time younger workers should expect more changes like this, especially ones that could reduce benefits. To improve our country’s fiscal situation, something has to give, and the Social Security system is a likely target. Depending on how far away your retirement is, you probably shouldn’t plan to depend too much on Social Security benefits.
While early baby boomers and members of the silent generation were able to rely on pensions, Social Security and their own savings, millennials and Gen Xers may not be so lucky. Various trends are shifting more responsibility onto workers to secure their own retirements.
Members of these older generations were likely to go to school, work at the same job for 30 or 40 years, retire with a pension and then draw Social Security benefits. They were good savers. They probably never thought of themselves as wealthy and never seemed rich or spent frivolously. Because they have a significant amount of guaranteed income each month, they are now able to live the “golden years” of retirement.
Later baby boomers and early Gen Xers saw their parents making it just fine and thus haven’t had the same urgency to save for themselves. At the same time, not nearly as many companies today offer defined benefit (pension) plans. Social Security is also in danger of being cut back, reducing benefits or delaying eligibility for many workers. This is why many Americans over the next 20 years will experience a retirement crisis. Retirement will have to start later or not be as “golden” as it once was.
Retirement planning for younger workers
Though these trends may have contributed to millennials and younger Gen Xers being pretty good savers, that may not be enough. Consider the impact that a Social Security benefit can provide. Drawing $20,000 a year is like having an extra $500,000 in retirement savings, assuming a 4% withdrawal rate over 30 years. That’s a significant amount of money. Not having Social Security to help cover the costs of retirement would be a huge blow to these retirees.
But what younger workers have on their side is time. They should start saving now and take advantage of compound interest, the eighth wonder of the world, as Albert Einstein once said. By aggressively saving at a young age and continuing that trend over time, you will give yourself a much higher chance of success during retirement.
Before you go and buy that big house, nice car or new pair of shoes, think about the benefits of making the right small decisions consistently over time. You won’t truly know the impact until you sit down and make a plan. I urge you to take that step today. The implications of your decision could impact you for a lifetime.
The good news is that there are numerous financial platforms available to inform and provide guidance for young savers and investors. Financial advice for younger people is more affordable and more accessible than ever before. So get started today!
Image via iStock.