We young people (and middle-aged, and uh, mature people) have a financial problem.

We’re not saving enough for retirement. Not even close. The American savings rate is in the dismal single digits. How the heck is anyone going to live for 20-25 years on $250,000? I’ll tell you how:

by eating dog food and living in government housing

Back in the good ol’ days grandparents lived with their children and people worked pretty much until they dropped dead. Nowadays, we want independence, we want to retire early and, thanks to modern medicine, we’re living even longer. It’s not unfathomable that the average, healthy person currently in their mid-thirties could live 30+ years in retirement.

So why don’t we save enough for retirement? Why do we suck so much? Just kidding. You don’t suck, but here are a few reasons you aren’t saving enough for the golden years:

1) You’re Busy Buying Stuff Now

The latest generation iPhone is one sexy piece of consumer electronics. Why put $300 in a place you won’t touch for 40 years when you could be rockin’ the latest time-wasting app on your smartphone?

2) You Can Always Catch Up Later…

This goes along with the previous reason. You’re busy with mani-pedis. You know that once you hit 55, you can put an extra $5,500 per year in your 401(k). You’ll catch up then, you tell yourself.

Problem is, by then you’ve missed decades of visits from the magical leprechaun known as compounding interest.

Your pot at the end of the rainbow is full of Purina Dog Chow

and the leprechaun there to greet you is not the friendly one from Lucky Charms, but rather the killer from these movies that haunted my nightmares as a wee lad.

Whew, I just went to a difficult place…let’s get back on track.

3) You Forgot Inflation

A million dollars ain’t what it used to be. And in 30 years, how much do you think it will be worth then?

At an average of 4% per year, it’ll be worth $293,858. Ouch. You need to invest in assets that outpace inflation. Get out of CDs and into the stock market.

So…Where Do We Go From Here?

How much will you need to retire comfortably? I’ve heard many ways to estimate. I’ll give you one of the most common.

First, calculate 70% of your current annual income. Hopefully, by the time you retire, you’ll be out of all debt including the mortgage. Also, the kids should be on their own, lowering your expenses a bit more.

Next, divide that number by the withdrawal rate you’ll use in retirement. The “withdrawal rate” is the percent of your nest egg you’ll pull out each year to live on. Financial folks say 4-5% is a safe amount in order to use only interest and keep the principal intact.

The result of this calculation will give you a ballpark figure of how much you’ll need to retire comfortably. Let’s do an example. Say 70% of your annual income is $50,000. And we’ll use the more conservative withdrawal rate of 4%.

$50,000 / .04 = $1.25 million.

This means you should be able to spend $50,000 per year indefinitely.

Remember, there are so many variables in play (inflation rate, rate of return on your investments, actual expenses, etc.) that this is only an estimate.

Now, how much per year will you need to invest to reach this goal? Use this handy retirement calculator to figure it out. Enter 8-10% for the expected interest rate.

I know you don’t suck. I know that deep down, you really are concerned about saving for your retirement.

So get to it! Don’t let the normal reasons for underinvestment slow you down.

1. Figure out your retirement goal
2. Determine your monthly contribution
3. Read my free guide to learn where and how to invest for your golden years

Because that’s what we want your pot at the end of the rainbow to be full of:

Gold, not dog food.

And you won’t be stuck saying, “Where da gold at?“

Tags: retirement investing, retirement savings

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