Scriptures: Numbers 8:24-25; Mathew 6:31-34; Ecclesiastes 11:2
When should I start saving for retirement? Should I be debt free before I start? Is retirement even a part of God’s plan for you? How can you be sure that you will have enough to cover your needs as you get older?
The short and sweet answer is as soon as you can! To save your money in an IRA, there are some rules (age 18 and must have earned income) that you have to comply with in order to take advantage of tax benefits. I don’t plan on discussing these tax topics in this article, but you may be asking: what are the advantages to saving earlier rather than later?
The simple answer here is compounding or should I say the power of compounding. When you place money in a savings account it will collect interest. This interest is typically posted to your account monthly. The following month, you will have not only what you deposited but also the interest that was deposit by the bank and so that at the end of the second month you are collecting interest on the sum of these two amounts, and so on. This is compounding; your initial deposit plus all of the interest is always collecting interest. Sort of like a snowball rolling down a hill continually collects snow.
When you open a savings account in a bank, you will see two rates of interest; the interest rate that is applied monthly and the APR or the Annual Percentage Rate. The APR is the equivalent interest rate if all you received was interest payment once per year, rather than monthly. So, the APR will always be higher than the monthly interest rate.
Note: You should always check to see when the interest payment is posted to your account. Some accounts post monthly and some quarterly. If the interest is only posted quarterly, the APR will be lower.
There is a classic example that demonstrates compounding. Two investors choose two different savings strategies.
· Sally starts saving at age 21 and saves $1000 per year for eight years and then stops.
· Bobby starts saving at age 29 and saves $1000 per year for 37 years.
· Both examine their savings account at age 65, both of which were collecting 10% interest (yes I know that you can’t find this rate today but this is an example).
· Who has more money?
o The answer is Sally! She has $427,451 in her account and she only invested $8000. Bobby has $363,043 and invested $37,000.
o This is the power of compounding!
Bottom Line: Start saving for retirement as soon as you can!
Though, the very tough question to answer is: How much money should I save for retirement?
Realize there are many factors that go into answering this question, such as:
· How long will you live past 65?
· What will inflation do to the cost of living and consequently to my savings?
· Will you be healthy in old age or will you have costly medical expenses?
· How much do you think you will spend each year?
· Will Social Security be around to supplement my savings?
· Will Social Security raise its retirement age beyond 65 like some European countries have done in their programs?
· If I can still work, how long could I work? (Is Wal-mart still hiring greeters?)
And with so many unanswerable questions, how can you know for sure? Bottom line is that you can’t know; you can only estimate your needs and plan accordingly. The current estimates are that most people would need somewhere between $1 and $3 million dollars to retire. And I suspect that these estimates are assuming that Social Security does not factor into your income, since many believe it will be defunct at some point of time in the future.
Given these estimates for how much you need in your retirement savings, again, the bottom line is to start saving as soon as you can so that you can leverage the power of compounding.
Another question that many people ask is: Should you save when you are in debt?
I will say yes, but with conditions. You must have a budget that demonstrates that you are spending less than you earn and have benchmarked your budget against reasonable spending habits.
For example, most people don’t buy their first home with cash and so you will have a mortgage. If this family is living within a reasonable budget and can still set money aside to save for all of their short term debts, then yes by all means, save for retirement.
But if you have credit card payments where you are paying high interest rates (typically 18% and higher), I would suggest that you seriously consider eliminating this debt before you start saving for retirement. Yet, if your income can handle the interest payments, you can save and pay those high interest payments too.
Notice that I’m suggesting that your budget should always allow for retirement savings, even though you may have some debt. Again, it comes down to how well you have constructed (and live by) your budget. If you can plan for the expenses associated with debt, you can actually do both. But I will leave that to you to decide if that really makes sense.
Now let me take a step back and ask: Is retirement a Scriptural concept?
Well, actually, not really, at least for most of us. When you read Numbers 8:24-25, it was only the Levites (the priests) that were allowed to retire. Everyone else was expected to work. Nowhere else in the Scriptures does it suggest that retirement is an option or a path for any of us who are not in the business of preaching or teaching.
So, if we are not to retire, then why do we need to save for retirement?
Let me suggest that you are not saving money for retirement but to create career options when you chose to leave your current (secular) job. That is, many of the career options for doing Kingdom work do not pay very well. (This is unfortunate in and of itself.) If you have a heart for missionary work or even working in a para-church ministry, then you may want to be saving money such that you can augment your new salary with the savings you have accumulated. In this, you keep working but are not hindered by your financial condition. (Imagine what could be possible if there were more Kingdom workers!)
Lastly, I will leave you with some questions. Should we, as Christians, depend on the government for sustaining our needs as we grow old? What role does God play in our last stage of life in this world? Please do consider Mathew 6:31-34.
For more information about retirement, check out these articles at Crown Financial Ministries.
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