Orthodontist with college loans equaling one million dollars! Unthinkable? Fortunately, the majority of young adults escape that financial trap. But many develop a mindset that accepts debt, ignores saving, and promotes a declining future lifestyle.
Josh Mitchell with the Wall Street Journal recently wrote about an orthodontist who accumulated more than $1 million in student loan debt. Incredible! What’s even more astounding is at least another 100 Americans are in the same boat. While I hope you are not in this predicament, don’t fall prey to the financial thinking that jeopardizes your future security.
Some Debt Is Unavoidable
Life situations happen that make debt unavoidable. And that’s not all bad. Debt calculated to help you reach a goal can be helpful. For example, you may incur student loan debt now to obtain a degree that sets you up for future. And locking in a mortgage today, at still relatively low interest rates, can decrease your expenses down the road. This doesn’t mean you should attend the most expensive school that accepts you or that you should buy the most expensive home you fall in love with. The key is to keep your debt load as reasonable as possible so you can begin paying it off and accumulating savings at the same time.
New Mindset – Don’t Wait to Save
According to journalist Ali Malito with Marketwatch, a Fidelity study suggests that by age 30, young Americans should have saved the equivalent of one-year’s salary – and they should double that amount by age 35. I’ll bet this statement will touch some nerves! This means you should start saving in your early 20s.
Some of you may now be doing a mental tally and thinking: "If my annual salary is X and my savings should be twice that, I’m behind! I need to step up my savings!" That’s the mindset that leads to success.
Others will make excuses for the shortfall. My favorite: "I need to live my life now. Once I settle down, I won’t be able to live downtown or travel the world."
What they don’t realize is that living more lavishly now may mean lowering their living standards later. Do your future self and family a favor – be prudent today.
Tying your savings goals to specific ages creates nice milestones for which to aim. Done correctly, these goals should lead you to appropriate long-term goals, such as retirement.
When planning for your retirement, you will be considering all sources of income, such as pensions and social security. But be careful, pensions are guaranteed by your employer. The Pension Benefit Guaranty Corporation typically provides only minimal protection if a company fails or no longer exists.
Social Security – I Don’t Think So
Will Social Security be around when you retire? Probably. But to count on future benefits being equivalent to today’s offerings is wishful thinking. Social Security and Medicare are "kick-the-can" problems that will soon run out of road. Over time, the road will be shut down for a complete overhaul that will require significant changes.
Eventually the government will fix Social Security, probably through a combination of reduced benefits, delayed benefits, and higher taxes. So, the less your retirement relies on pensions and Social Security, the more secure you should feel.
Plan More; Save More
If you want to calculate your future retirement needs to estimate what you need to be saving today, be conservative. Don’t assume pensions and Social Security will be as promised. If it turns out they are, that’s an added bonus!
Regardless of your age, save and save early. Increase the automatic savings to your retirement plan. Make contributions to a Roth IRA, IRA, and/or a Health Savings Account. If you have significant debt, make a plan to reduce your debt quickly and follow that plan. Then start saving.
At the very least, don’t get $1 million in student debt!
Bill Wendling, CFA, is a Senior Portfolio Manager with Bedel Financial Consulting, Inc., a wealth management firm located in Indianapolis. For more information, visit their website at bedelfinancial.com or email Bill.