For more context I don’t think retirement was a normal concept until recently (ie, choosing not to work even though you could). Maybe for 1-2 generations before yours, but that’s it. Prior to about 1900’ish, people just didn’t retire or if they stopped working for whatever reason, they were just poor. They also likely didn’t live as long. Since then, we’ve tried putting together a patchwork of safety nets to help people retire in old age.
For people who could not work, most people didn’t spend a lot of money (willing debt was not really a thing) and people lived more meagerly in general. After roughly 1930’ish the patchwork of safety nets starts to take hold…people could use social security to help them retire. Pensions started to come into fashion (you had to stay with one company for awhile to get one), and would cover about 50% of the private workface at its peak around 1960-1980’ish, and then declined as the pension swapped out for the 401k. In 1965, Medicare started to help people over 65 with medical costs.
That’s about it. In short time frame, it went from nothing to Social Security/401k/Medicare. If you want to live on more than social security, you need to save for retirement via 401k, or if that’s not an option, just a savings account/mutual funds, etc.
I don’t think there was a good old days or normal retirement. Maybe the stars aligned for a decade or so for some, but I’d say that would be outside the norm.
@Reply How’s this fire hose of information so far? I think everything has been covered - Velocity, SpoilerVirgin and snowthx have particularly useful posts above that should be where you start with any questions.
A few questions for you:
Have any of your jobs had 401k or other retirement options?
Have you ever worked for the government (at any level, including schools)?
I’m in the minority as I have a traditional, full federal pension from working 42 years at NASA. I started there in 1964 and kept the original CSRS (Civil Servant Retirement System) even when offered the opportunity to switch to the new FERS (Federal Employee Retirement System) in later years. I never contributed to Social Security and am not entitled to any. I never had a 401K. I have some modest savings as I spent my extra on wine, women and cars and wasted the remainder. In the past few years I have placed most of my savings in CDs as they are high interest at the moment. 5% worry free interest although the rates are now dropping.
Full federal retirement is 80% of your salary when you retire after 40 years plus a bit for unused sick/personal time (I had about a year saved up). Minus 9% for spousal benefits (when I die my wife receives 55% of my retirement income each month). Thanks to cost of living increases my retirement salary is now more than what my actual salary was when I retired in 2005. My government life insurance policy was fully paid by the time I was 65. I get to choose whatever health insurance plan I want with 50% paid by the retirement system. I have Blue Cross/Blue Shield FEP that covers almost all of any doctor bills. I do have Medicare Part a.
The present Federal interment (FERS) is the now popular 3-legged system. SS + smaller federal retirement + 401K which you can completely control. The younger employees loved it as they would buy riskier stocks to build up (hopefully) and could switch to safer investments as they get older.
Correct, this can work, because as of now there is no time limit to claim then. Congress could change that law though, presumably it would not be retroactive so you’d still be able to claim the remainder by some point. Also you need to have insurance that supports HSA, changing jobs or plans just means you can’t contribute any longer, but don’t lose it.
HSAs are nice because they’re triple tax advantaged: contributions, withdrawals, interest. Though contributions will have FICA if you manually contribute instead of payroll deduction.
One of the big stumbling blocks here in the US is medical insurance. As I mentioned in my comment Medicare does not become available until age 65, so if you want to “retire” before that, you may be giving up employer-paid health insurance plans, and will be on your own to cover that. This is a significant expense and may draw down retirement savings of any kind quickly, even with state-level subsidies in the insurance marketplace, assuming you can find a plan like the one your employer offered. For someone age 40 like the OP that’s 25 years to go to access that benefit - ka-CHING!. I believe a lot of retirees under 65 who are not disabled seek employment not so much for the paycheck as for the health benefits. Such is a way the US works differently from more civilized nations.
The other thing to keep in mind about HSAs is that, when you turn 65, you can withdraw funds for any reason, without a penalty. If you are withdrawing it for reasons other than medical expenses, you will have to pay income tax on the withdrawn funds. But there’s no penalty for the withdrawal. So the HSA essentially starts functioning like a traditional IRA.
You also can’t contribute to an HSA if you’re covered by Medicare.
All of this is, of course, assuming that the rules stay the same.
This is very true and why most people in the US don’t usually retire until they are 65, or close to it, however being 40 is a good age to assess what retirement is likely to look like so you can make intelligent choices and decisions without having to learn the hard way.
The bottom line is that if you were expecting to live comfortably on what you will be getting from Social Security alone, think again, and either come up with another source of retirement income, or plan to relocate to a place that is relatively inexpensive, such as Alabama or Mississippi, if you don’t already live there.
My 98 year old dad put a lot of money into his 403b and kept investing aggressively after retirement. With Required Minimum Distributions (RMDs) being quite high for a 98 year old, every year he’s earning the most income of his life. My folks are barely touching their principal because they fortunately just don’t have much to spend it on.
I fear my comments will be viewed as insulting. I do not intend them to be. I am curious as to how someone gets to be 40 years old with such an impressive level of ignorance as to - well - not only financial matters, but how to plan for the future.
I know quite a few young people in their 30s and 40s who have every intention of retiring. But they are not floating around between random gigs, and they make various efforts to save for the future. Sure, it helps to be educated and reasonably intelligent (not intended as an insult to anyone.) But living within one’s means and consistently saving and investing - whether on one’s own or through a 401k - yields tremendous benefits decades later. You shoulda started in your 20s, but better to start at 40 than to wait until you are 60.
But uneducated, unintelligent people who lived beyond their means and did not figure out how to establish a decent career have always faced challenges as they age.
I’m not sure exactly what your work history looks like- but if you have a job where some sort of deferred compensation account is available ( most common is 401K but there are others) contribute to it. Even if your employer doesn’t contribute a dime. Even if you can only manage a few dollars. If someone had told me at 30 how much my balance would have grown by the time I was 61, I’m pretty sure I wouldn’t have believed them. Remember that for tax deferred accounts, the paycheck impact will be less than the contribution - if you contribute $100, your paycheck might only decrease $85 or possibly even less , depending on your particular tax situation. My advice is to contribute a percentage, which means your contribution will go up as your income does and you won’t feel it. If “random gigs” means a lot of short term temporary jobs, then put money in an IRA. It will be more work than a payroll deduction plan
I’m pretty sure my 34 year old son was annoyed when I basically forced him into starting to save for retirement when he was 24 - but now that he’s been doing it for ten years he’s happy I did.
I can’t promise you’ll be able to retire if you plan for it and save - but I can pretty much guarantee you won’t be able to if you don’t plan and save. Best case , you’ll end up like an acquaintance of mine. He’s planning to “retire” when he’s 62 - but by “retire” he only means he will collect SS because he doesn’t have enough retirement savings to stop working
This is the brutal truth. In times past one could count on their Social Security and maybe a pension to cover the expenses of their retirement. Sadly, that security is no more, and you gotta take things into your own hands, and not count on either SS or a pension (yes, we all will likely get some SS benefit, but it alone wont be enough to live on, even in an inexpensive place, unless you are doing the whole FIRE lifestyle thing the rest of your life). Add to that the current and expected cost of things and medical needs, depending on SS alone wont cut it.
As mentioned, the OP can still make significant headway - still plenty of time to live comfortably later in life. It will take a few small changes and small sacrifices now to pay dividends later. But, the longer you wait, the larger the changes will need to be made, and the bigger the sacrifices. As others have mentioned, think about what you can do. Right now. This week. To provide yourself a better, more comfortable retirement. It can be as simple as opening an account at Schwab and throwing some money in there, and moving it into an index fund. Then next month adding some more, and making it regular. There are many ways to move forward, but only one way of standing still.
This is what worked for me. Make it happen automatically without you having to do anything. The money leaves your paycheck and gets deposited into an IRA or 401K and soon you won’t even miss it. Start small, and increase the amount as your income increases, or as you reduce your monthly expenses (small sacrifices).
You’ll receive monthly and/or quarterly reports showing how your money is doing. As was explained previously, there is always risk investing in the stock market, even if you buy mutual funds, so don’t expect a straight line of growth upward. It doesn’t work that way. Fortunately, you are young and time if on your side.
The average annual growth of the DOW average over time is roughly 10%, but there’s no guarantee. Invest as much money as you can spare and you should have a nest egg to live on when you finally decide to retire. BTW, nobody is forcing you to retire. You can work the rest of your life if that’s what you want to do. Some people never retire.
Oh some have indeed done well picking a few stocks that did well. But in general the broad stock market funds are over a time frame of several decades a fairly low risk choice, even though the word “risk” gets used to describe the volatility you may experience along the way.
The biggest key is simply starting as early as possible and staying the course.
this is a fairly well-known strategy for knowledgeable investors. The benefit is that the money (both contributions and earnings) continues to grow tax free in the intervening years. So yes, you are using after tax money to pay the bills now, but the alternative is using HSA money to pay the bill now and investing the after tax money in a brokerage account, which will suffer tax drag from dividends and capital gain distributions.
I work for local county government in PA and I will retire with a decent pension along with social security.
They also allowed me to “buy back” my military time which added on to the pension. I did that a few years ago so it’s all set.
No medical insurance will follow me in retirement but at least I have a pension.
I’m in a little different situation. I work for a county government that opted out of Social Security. Instead, that money was put into different diverse funds. There is a board of about ~10 that make investment decisions, that you can pick from.
They do quite well, they are vested in it. It’s their money too.
Dropping out of SS was an option many years ago for a short period. I think two Colorado counties have it.
No pensions here. But the money is mine. I don’t have to worry about SS, though I will get a little from that from before working for the county. I have enough months/quarters in.
Well put. Put your money to work for you.
I know this was not addressed to me, but may be able to shed some light on this. I have a favorite nephew. I consider him a friend. Has a degree in anthropology. He is about 40yo. He does gig work, is in a band or two. Works construction, or in coffee shops or whatever.
Now I think a degree in anthropology is very cool. But there isn’t any money in it. He’s perhaps the most laid back guy I know. Shit, he’s lived with six strangers in a rented house. That was OK by him. I can’t even fathom that.
I wasn’t quite in the same situation as the OP. I never did gig work, and always had a steady job since I started working. And I had some amount of savings built up. But I was in my late thirties before I started seriously thinking about saving for retirement, doing any sort of investing, anything like that. I think that most people don’t think about it when they’re younger, unless they have parents who really drill the importance of personal finance into them.
In fact, I can remember my first real job, just out of college. The benefits people talked about retirement options, and I thought, “Well, retirement is years away. That’s not something I have to worry about now.” Oh, how I wish I had enrolled in that 403(b) when I had the chance!
I got lucky in that, when I was about 30, I started working for the state of Indiana. Public employees get enrolled in the state’s retirement system automatically. In addition to the state pension, there’s also a tax-advantaged investment account (essentially a 401(k) in everything but name), and the contributions are automatically deducted from every paycheck. So I was saving for retirement without even quite realizing that I was doing it. By the time I was almost 40, and really started thinking about it, I was pleased to discover that I already had a good amount invested.
But if it hadn’t been for that bit of luck, I might have been in a very similar situation to the OP; 40 years old and nothing saved for retirement.
But I will echo what others have said: at 40, you’ve still got quite a bit of time to get some savings built up.