imareal1 wrote:Hi, I'm 24 yrs old and almost one year into my actuarial career (first real job). I expect to make good money in the future and have started investing since I was hired. My question is why is saving a lot for retirement so important? I get that we need money for when we're retired and no longer have an income from working, but it seems like the amount needed usually requires a lifelong sacrifice of saving relentlessly and living frugally. This is where I'm kind of missing the logic of saving for retirement. My perspective of an ideal life is to live adventurously (AKA lavishly) while we're young and have energy to enjoy life and chill out when we're old and have less expenses. This clearly goes against general investing for retirement advice...
I'm basically asking for a justification of why I'm putting away significant money into my 401Ks and IRAs that I can't even touch until I'm 65 and old and don't have the energy to do the stuff I would do now in my 20s.
Well, if you're an actuary you should be able to do the necessary math for yourself, so go do it and see what answers you come up with. That's not a brush-off, you really should give it a whirl.
"Less expenses" when we're old is not "no expenses." As a matter of fact, I think the idea that "old folks spend less" has a fair amount of myth to it. It doesn't take into account health-care expenses (sum of insurance premiums plus out-of-pocket... in my case, so far, out-of-pocket has been close to zero but Medicare premiums plus Medicare supplemental policy is not at all zero). You have to eat. You need a place to live. You want a phone. And a cell phone to call for help. And TV and internet. And so forth. You don't watch less
TV as you age. (Oh, yeah... we were having a little trouble understanding the dialog on drama shows, add another $250 for a sound bar with a dialog-boost feature).
Furthermore, to some extent the energy of youth enables you to same money on some things, whereas as you get older you spend/waste money on small luxuries if you have the money to waste. Young people buy fast cars, old people buy comfortable cars if they can afford to.
We had a slowly dripping kitchen faucet, one of the new "cartridge" kinds. In Ye Olde Days I'd have taken it as a little adventure, shut off the water, figured out how to open the faucet, taken out the cartridge, gone out to the local plumbing supply place etc. If I'd gotten the wrong replacement or somehow bunged it up putting it in, I'd have cussed a bit and gone out for another, while my wife made do without a kitchen sink for a day. Well, all this stuff is harder when you're wearing bifocals... and aren't anywhere near ready for a cataract operation but still need a little headlamp to see into dark places... and it kind of hurts to scrooge yourself around into the right shape to get into the cabinet with the latch that digs into you when you reach around to where the shutoff valve is... and it won't turn because you haven't used it in fifteen years... and you really give it the muscle and it snaps off in your hand and you bang your funnybone and... well, I am ashamed to admit it but we called a plumber and we paid (gasp) $125.
Young folks stick a toothbrush, a sleeping bag, and a tiny bivvy tent and head out into the back country. Old folks pay $7,000 to go on those trips the alumni association mails out literature for. We want our busses, someone to cook food for us, and a place to plug in our CPAP machine.
My wife and I still mow our own lawn and clear our own snow. For how long, do you think? Someday we're likely to hire a yard service and a "snowplow guy."
Old people like
little luxuries and nice things. You don't think of them as luxuries because the very idea of a stairlift disgusts you.
So, what do you think is a sensible planning number for your life expectancy at age 65? (Do you seriously think you're going to shoot yourself just because you can't windsurf any more?) Do everything in real dollars so that inflation drops out of the equation. Guessimate what you think your household budget will be. Guesstimate what you'll get in Social Security. Decide whether or not to use the official numbers or discount something for the possibility that Social Security won't pay out as much then as it does now. Guesstimate something for health insurance. If your Social Security really and truly exceeds your estimated expenses, then, fine, stop right there, don't save anything. Otherwise...
...well, the basic proposition as I see it is that you have to save enough money during your forty earning years to support yourself during twenty-five retirement years
. Now, figure that Social Security is something like saving 15% of your salary, and do the rest.
Seriously, you're an actuary, run the numbers. Tell us how it comes out. That will be much better than any rule-of-thumb or workbook answer, and you'll believe it and act on it because you understand what's behind it. And you can decide for yourself whether to assume that you'll be pulling up roots and moving to a lower-cost-of-living place.
Oh, I forgot the cost of spoiling grandchildren. Very important.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.