Life is long, plan accordingly

“Live for the moment!”

“Life is short!”

“You only live once!”

I'm sure you've heard phrases such as this before, often sprouted by the youth from teenagers to young adults in their early thirties. These are statements usually used to justify doing things for instant gratification or behaving recklessly. Such actions include spending money in irresponsible ways or doing drugs.

While life expectancy depends on many factors such as lifestyle, current health, and genetics, the actual fact is that more people are now living longer than ever. 

In the United States, women have an average life expectancy of 81 years and men have an average life expectancy of 76 years. The average life expectancy of Americans is 78.7 years.

A 21 year old screaming “you only live once!” at the club may realistically be looking at over 55 long years ahead.

Every now and then it's nice to be reminded why it's important to stay on the right financial track.

If you haven't done any planning for retirement, here is your wake up call.

Life is long, so you better plan accordingly

If you ever want to think about being financially free, you need to seriously consider how you are going to get there.

If you are working, then you need to start thinking about when you will retire. Otherwise, you may never stop working. When you're no longer able to work, our government won't let you starve... but they won't strive to provide you with a nice, comfortable life.

The financial decisions you make when you are young will ultimately help to determine when and if you can comfortably retire.

Financial freedom

My goal is to reach financial freedom.  Reaching financial freedom means having the ability to work not because you need to, but because you want to. Being financially free means that you can live your life on your terms and not be a slave to money or debt.

In theory, getting to retirement and financial freedom is easy:

1. Track your spending
2. Earn more
3. Save more by spending less
4. Invest the difference (stocks, bonds, real estate)

You can retire when you have more money than you can spend in your lifetime.

A simple shortcut to determine the amount you need to retire is to take your annual spending amount and multiply that by 25. Successful retirement is when you expire before the funds in your portfolio do. Mr. Money Mustache has a great post on the safe withdrawal rate, and how much money you need for retirement here.

While getting to financial freedom sounds easy, the theory only works when you put it into practice.

Invest early and often

Don't underestimate the power of investing early. Consider a 20 year old who invests only $1,000 a year and earns 7% on his investment. After 30 years of continuing to invest only $1,000 a year, our now 50 year old has a portfolio balance of over $1.2 million dollars. This is because of compound interest. As more time passes, he will accumulate more interest, and the accumulated interest will also be accruing more interest.

A 30 year old investing $2,000 a year for 20 years will have more than $1 million dollars by the time he is 50 years old.

However, a 40 year old investing $3,000 a year for 10 years will only have a little over $522,000 by the time he is 50 years old.

As you can see, investing early and often will make a dramatic difference in the size of your retirement portfolio and can knock years off the amount of time you need to work.

Useful tools to help you on your journey

You can find out how long you will expect to live with a life expectancy calculator found here.  Use mint.com and clearcheckbook to track your spending. Use Manilla to track your bills.  

You can use the compound interest calculator at moneychimp to see how investing over time will affect the future value of your portfolio. I suggest using an interest rate of 7%.

Finally, to see how long your money will last in retirement, check out the retirement calculator at firecalc.com as well as the updated version at cfiresim.com. Looking for more retirement calculators? Check the extensive bogleheads list here.

What are you waiting for? It's time to get started

“Retirement is so far off, there's plenty of time to worry about it later.”

“Everything will just work out somehow.”

“I'm struggling just to get by right now.”

These are terrible excuses not to start saving for your retirement. A recent poll shows that about half of of older workers are delaying their plans for retirement.  

I doubt most 65 year old workers today wish they spent more money or saved less when they were young. And I doubt most 65 year old workers today truly love their jobs.

Research conducted by the National Institute on Retirement Security found that 45 percent of working age households don't have any retirement account assets.  

Including all households, the median retirement account balance is only $3,000 for all working age households and $12,000 for near-retirement households.  Studies like this confirm that for many Americans, a comfortable retirement is impossible, even after a lifetime of work.  

Remember, starting with small amounts of savings can make a significant impact on your future.