When do I need to save for retirement?

Retirement seems a long way away for many of us. In fact, many people reading this may still be in school preparing for their first full time job. The average retirement age in the United States is 62. The average life expectancy in the United States is 79. Generally speaking, you will need enough saved to support yourself for around 17 years in retirement. This may not seem like a difficult task, but with the changes in technology and medicine, it is not absurd to think that we could live to well into our 80’s and 90’s. Having enough money saved to support yourself for over 30 years now seems like a daunting and scary task!

Many plan to travel and live a comfortable lifestyle once they retire. The truth is you must allocate your funds effectively for years in order to achieve this. You must plan for all the unwanted expenses, such as medical expenses, that will occur as you age. Many people forget that your expenses will increase during the later years of your life. You will be more likely to get ill, which could cause thousands of dollars in medical bills. You may need to live in an assisted living home towards the end of your life. The average stay in an assisted living home in slightly over two years! This can easily add up to over $100,000 as the average cost of assisted living per month, in Illinois, is $4,050. According to AARP, they project that the average 65 year old couple will occur $240,000 of medical expenses in retirement. If you do not think about what can go wrong right now, you are putting yourself at a major disadvantage.

The short answer to our main question is as SOON AS POSSIBLE. The earlier you fund your retirement and other savings accounts, the more your money will grow. As you can see, the earlier you put your money away, the more you will see the beauty of compound interest. Investing in retirement at a young age will give you a huge advantage, which you will realize later in life. If you start saving for your retirement regularly in your early 20’s, you will be able to accumulate a solid foundation for the future. Saving a few hundred dollars a month and putting it in a retirement account may seem unnecessary to a 20 year old, but you will thank yourself when you begin to think about retirement. It is never too late to save for retirement; someone in their 30’s or 40’s could retire in their 60’s if they fund it efficiently and effectively. One thing is for certain, they will need to increase their average contribution compared to someone in their 20’s, as they will not be able to fully take advantage of compound interest.

To conclude, in order to plan for retirement you must start saving early and often. You will also need to think about unwanted or possible future expenses such as assisted living. Keep in mind the quality of lifestyle you want when you retire. Do you want to buy a new home and travel the world? Or are you content downsizing and living a simpler lifestyle? Hopefully after reading this you are more aware of how to save for retirement and why it is so important.

Written by: Kevin Kawarski, Financial Wellness Peer Educator, University of Illinois Extension, Spring 2018

Reviewed by Kathy Sweedler, Consumer Economics Educator, University of Illinois Extension.

As a recent graduate, how do I determine how much of my income to allocate to emergency savings?

Approaching this question first requires you to determine your critical expenses. Everyone’s critical expenses are subject to variability, but some broad categories would include housing, food, health care, utilities, transportation, and any debt you may have. You should not include anything you’d cut from your budget in the event of job loss or major catastrophe. For example, entertainment, dining out, nonessential shopping, vacations, and saving for a second home are not expenses that are critical to your welfare in the short-run.

Once you have determined the total cost of your critical expenses, experts believe you should have enough money in your emergency fund to cover at least 3 to 6 months’ worth of living expenses. In the first few months of your career, the percentage of your income allocated to savings will be high because you will be building your initial emergency fund. Furthermore, it is important to reevaluate your list of critical expenses at least once a year, or after new major life events such as buying a house or having children as your situation may change.

3 to 6 months is a good rule of thumb but sometimes it’s not enough. For instance, during a recession where unemployment rates are higher, and the length of unemployment is often longer, you might want to think about expanding your emergency savings if you’re in a high-risk industry where layoffs are common.

Lastly, always remember something is better than nothing! If you don’t think you can save enough now, don’t panic! You can build up to it by stashing away smaller amounts on a regular basis. The important thing is that you’ve started saving something.

Written by Matt DeLeon, Financial Wellness Peer Educator, University of Illinois Extension, 2017.

Reviewed by Kathy Sweedler, Consumer Economics Educator, University of Illinois Extension.

Why should I build an emergency fund?

It’s easy to spend all the money in your budget (even if you don’t have one), but what happens when you have an expense you can’t anticipate? Whether you have a flat tire or need to make a surprise purchase, having an emergency fund can be a financial lifesaver.

Of course, some emergencies don’t impact the amount of money that you spend, but the amount that you earn. A common issue people face is losing their job. Suddenly, you have little or no income, but your fixed expenses stay the same. Any surprise that causes you to spend more money than you earn is an emergency.

So, what is an emergency fund? Simply put, an emergency fund is an amount of money that you set aside to cover expenses that you can’t anticipate. Generally, an emergency fund is kept in a bank account to accumulate interest until it is needed, as well as to ensure that the money is safe, both from being lost and from accidentally being spent. The best part is that starting an emergency account is easy!

  1. Know your Needs and Wants: The first step is knowing how much money you would need if an emergency occurred. If you lost your job, how much would you need to live your life for a month? Two months? Also, be realistic about your needs. You might be able to cut back on your trips to the movies if money is tight, but it’s unlikely that you can instantly move to pay lower rent.
  2. Know How Long to Prepare For: Do you feel safe having one month of expenses on reserve, or do you need more? After the Great Recession, many people agree that you need between three to six months of expenses to be completely safe.
  3. Get Started: This is the hardest part. Start with small goals and add to it over time. If you can only start with a few dollars a week, it will grow over time and be a lifesaver when you need it!

Written by Collin Smith, Financial Wellness for College Students Peer Educator, University of Illinois Extension, 2017.

Reviewed by Kathy Sweedler, Consumer Economics Educator, University of Illinois Extension.

How can I successfully achieve my goals?

Creating a savings goal is commonly confused with creating a dream. For example, when people are asked to create a savings goal for a vacation trip or a car, their response is “I want to go to [location]” and “I want to have a [car model]”. This only represents what the individuals want (a dream) without creating a reasonable process (savings goal) to achieve this end product.

That being said, we peer educators at the Financial Wellness for College Students program advocate S.M.A.R.T. Goals. When creating a savings goal, it is important that you incorporate all five of these components: Specific, Measurable, Agreed Upon, Realistic, and Timely.

Specific: Make your goal well defined so that it can be clear to anyone who has a basic knowledge of your project.

Measurable: Create an easy way to keep track of your goals that allow it to be motivational to achieve.

Agreed Upon: In cases when your goal involves others, collaborate and make sure that everyone acknowledges the goal.

Realistic: This allows your goal to be results-oriented and a reasonable-seeming accomplishment.

Timely: Create a timeline when this goal will be achieved. Being able to track your progress encourages you to continue and see that the effort is effective.

Download a handy form to write your own S.M.A.R.T. goals.

Written by: Rex Wang, Financial Wellness Peer Educator, University of Illinois Extension, 2017.

Reviewed by: Kathy Sweedler, Consumer Economics Educator, University of Illinois Extension, 2017.