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Saving For Retirement In The New Economy
By: Murad Ali
Let’s face it. Most of the financial advice out there says something like this,
“If you make on average $60,000 per year…” Most of the advice is designed for
baby boomers about to retire. The young generation 35 years-old and under are
not going to relate when their incomes range from $25,000 to $40,000. True their
income may rise someday but there is a good chance it could decrease with the
onslaught of lay-offs, downsizing and cost cutting. The wages their parents
earned who worked at companies like GM making a combined income of benefits and
wages in the $65 per hour range are not likely to be around in the future. Many
of these companies have two-tier wage systems that hire new workers somewhere
around $24 per hour (benefits and wages combined). Not only are low wages going
to be a problem but also lack of employment opportunities, high interest
mortgages, expensive college education, lack of social security income and major
cut backs in all federal spending. So what strategies should a young person
making his/her way in a “tough times” economy to do?
The biggest advantage young people have is their age. Compound interest is a
very powerful force that is likely to make or break a retiree. By putting away
only $200 per month from the age of 30 and compounding it at 9% interest a young
person could have around $500,000 by the time they are 67 years-old. Double that
amount and you could be well over a million dollars. With a 401K offered by your
employer it becomes very easy to save because it is pretax dollars that you
don’t have to think about.
You may also choose to put your money into a Roth IRA. Generally, the money is
taxed before it is put away and then you don’t have to pay taxes on it in
retirement. Not a bad deal when it has compounded for 30 years. The best
retirement utilizes a combination of the two. It is beneficial to put away money
automatically in your 401K and set a goal of putting away $100 or $200 per month
into a Roth IRA.
One may also consider reducing the cost of big expenditures and saving big
money. The housing market is beginning to cool as baby boomers are leaving the
market with their large incomes. It won’t be long before appreciation on houses
has returned to a mediocre percent such as 3%-5%. As a young person trying to
show his or her financial stuff they may want to buy the nicest houses they can
get. Unfortunately that nice house also comes with a large mortgage payment. A
good rule to follow is that your housing cost should not be over 25% of your
household income. For example, If my wife and I make 70,000 (two young
professionals at $35,000/year) than we could have a house that costs $1,400 per
month. Because we are financial savvy, with a lot of energy, we bought an older
house with an $800 per month mortgage payment, put our sweat equity in it, and
watched its value increase 20%. Because we were under our $1,400 limit we also
bought 10 acres for a nice cottage at $300 per month. Now we are increasing our
long-term assets at a cost of $1,100 per month. What happens to the savings?
Well they go into our retirement account.
Of course one of the best ways of saving money is diverting your expenses into
investments. Basically, “You don’t buy what you don’t need!” Go to discount
grocery stores, take cheap vacations within driving distance, buy good quality
clothes at discount prices, and stick to a solid budget. It is much easier to
save money than it is to make more. Keep in mind that even though you don’t look
as wealthy as your friends you are probably much wealthier financially. Trust
me; no one gets out of college making a hundred thousand dollars a year.
Therefore, don’t try and make your self look like it.
About the Author:
Murad Ali is a two-time published author of “A call to greatness” and “An American Mecca that deals with the economic and political reform. He is the author of The Muslim Times, runs a consulting business, is a doctoral student and a farm owner. For more articles written by Murad visit http://www.muradenterprises.org |
