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10.2 Saving and Planning for Your Retirement

Why worry about saving for retirement when there is Social Security? There are a couple of
reasons. First, Social Security was never intended to cover everyone’s retirement needs. As
mentioned previously, it was established as a safety net for the poor. Second, there are unan-
swered questions about the viability of Social Security’s future. Social Security is an unfunded
pension plan, which means that your contributions go to today’s retirees. With baby boomers
retiring at a rate of 10,000 per day, the number of workers who support those retirees grows
ever smaller over time. Finally, the amount workers receive from Social Security is barely
enough to live on. A single worker who averages $3,000 a month during his or her working
career would currently receive 35% of this amount, or $1050 a month, at age 62.

Making Your Money Work for You

We have spent quite a bit of time emphasizing how vitally important it is to save your money.
Once you have learned how to live within your means and how to save for your financial
goals, the next step is to learn how to make your money work for you. The best way to put
your money to work is to invest it and let it grow. Both the interest rate your investment earns
and how long you plan to invest the money affect the amount you are able to accumulate. It
is important to understand that the interest you earn will be compounded, meaning that you
will earn interest not only on your initial investment, but also interest on the interest you
earned in the previous period(s).

Recall from the module introduction how Elena Maria and her cousin Alberto started to save
for retirement at different times. Let’s imagine that Elena Maria began saving at age 18, whereas
Alberto did not start until age 30. They both save the same amount ($200 per month) until
they reach age 66, and they both earn the same rate of interest (10% compounded monthly).
Figure 10.2 shows the visual differences in their accumulated wealth. Elena Maria will have
saved $2,834,820, whereas Alberto will have only $501,951 in his retirement account. Alberto
would need to save nearly $1,125 per month in order to catch up to Elena Maria at age 66! That
said, $500,000 is a lot more than nothing and proof that it is never too late to start saving.

Figure 10.2: Value of accumulated wealth

By saving early and often, Elena Maria will be in great shape by the time she retires. Alberto’s savings is
still significant, however. It is never too late to start saving!

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