According to the Center for Retirement Research at Boston College, most of us should save around 15 per cent of our income, starting at age 25, if we hope to retire by age 62.
When I was growing up, my parents were particular about what I ought to spend my money on. I will never forget when my father gave me some money once on vacation, and I went to the store and bought what he regarded as “foolishness” and told me to take everything back to the store. This admonishment was after he gave me a very long lecture on how hard he had to work to earn money, and I should never take that or the value of money for granted. Therefore, I should use the money to buy only those things I need or save it.
I was 11 years old. But that was my father, the pragmatic, conservative, humble man whose personality of habitual routines has rubbed off on me.
Today, I can still hear his voice in the back of my head when I buy something, and he is the reason, perhaps, why I never buy impulsively but shop around.
Over the years I have tried to impart these same values to some of the young people I meet, and even my own child; however, there seems to be some alternate universe that many of them have chosen to live in, especially when they are not earning their own money.
When our son was at university overseas, my husband and I required him to provide a detailed Excel spreadsheet budget of his monthly expenditures for the first two years. It was not because we wanted to know what he bought. We felt he needed to understand how to budget, not spend carelessly, and live within his means on his own, especially in these times when financial transactions are digital and children today are not required to learn how to ‘balance a chequebook’.
Teaching our children financial literacy is just as important as the lessons we teach them about self-discipline and ensuring they don’t waste time in school.
Earlier this month, Americans revealed they needed almost US$1.5 million to retire with a middle-class lifestyle. However, some experts have said that what Americans believe is their “magic number” savings goal for retirement has increased by over 50 per cent since 2020. Therefore, they now need approximately US$ 2.5 to US$3 million.
While we would need a lot less in Jamaica, the principle is the same: We all have to save for our retirement.
Data suggests that 50 years ago we needed three times our annual salary to buy a home, versus seven times our yearly salary today.
According to the Survey of Consumer Finances in 2022, about 46 per cent of American households reported any savings in retirement accounts. Twenty-six per cent had saved more than US$100,000, and 9 per cent had more than US$500,000.
These percentages were only somewhat higher for older people. Those ages 50 to 54 were the most likely to have a retirement account. About 63 per cent of this age group had some savings, and 35 per cent had saved more than $100,000.
So, how do we tell this new generation of young people who live in the ‘now’ that they need to save?
Many say they don’t want to be like my generation, who works hard and don’t enjoy their lives simultaneously. They want to work hard and play harder; travelling to the places they desire, eating at the restaurants they love, and buying the things that make them happy.
I get it. They want to experience living while they are still young, and they can. There is nothing wrong with that philosophy if you have an income that supports that lifestyle. Unfortunately, many do not have the means, so we must teach them how to grow their monthly income, manage the one they have, or save for their expectations. What’s more, we must teach them how to save, so that if they cannot work suddenly or if where they work has an age requirement for retirement. If these lessons are not taught at home, then our schools need to begin aggressive programmes to assist.
“Today’s 25-year-olds make less than their parents and grandparents did at the same age, yet they carry student debt loans unimaginable to earlier generations. Neither the minimum nor median wage has kept pace with inflation or productivity gains, while housing costs have outpaced them. The statistics on children’s and young adults’ well-being are staggering.” (Scott Galloway, April 19, 2024)
Moreover, the cohorts who benefited most from the extraordinary post-war economic boom of the 20th century have not assisted the generations coming behind them. In 1989, adults under 40 held 12 per cent of household wealth, while those over 70 held 19 per cent.
Today, those under 40 command just 7 per cent of household wealth, while those over 70 control 30 per cent.
Here is what I’ve learned. We must first ask what lifestyle we want to lead when deciding to no longer work for a salary. Having done that, we can set our retirement and savings goals by considering how much will be needed for vacations, hefty medical expenses, or how long we think we may live.
According to the Center for Retirement Research at Boston College, most of us should save around 15 per cent of our income, starting at age 25, if we hope to retire by age 62. If that seems unrealistic based on your expenses, then speak to a financial advisor about the right amount for yourself to determine your monthly savings rate, then open a retirement account.
You can also choose investments for long-term retirement savings. Index funds offer instant diversification in hundreds or thousands of stocks and bonds. However, deciding how many funds to buy and how much of your balance to invest in each fund will be based on your personal asset allocation strategy.
Ideally, you shouldn’t need to check in on your retirement account’s performance regularly, but you will probably want to adjust your portfolio balance among stocks, bonds, and cash as you age. Perhaps many of us are now cautious about playing with our retirement this way, considering what happened with Stocks and Securities Limited (SSL).
You can also increase your retirement savings by automatically saving a portion of your salary bonuses or an unexpected windfall, directing loan payment amounts (ie, student or car loans and credit card debt) to your retirement account once you’ve paid off the debt.
Finally, avoid lifestyle inflation to spend more when we have more. That is going bigger or buying more if you suddenly get a raise.
Always remember, we all won’t stay young and energetic forever. So, have the discipline to plan for the long term.
Lisa Hanna
Lisa Hanna is Member of Parliament for St Ann South Eastern, People’s National Party spokesperson on foreign affairs and foreign trade, and a former Cabinet member.