Saving for retirement is probably the most important financial goal. CEO Peter Kraus explains what you #NeedtoKnow about it.

Transcript:

Sarah: Peter, last week you shared an article on Facebook and you pointed out that many Americans are just not financially prepared for retirement. What do you think are the best ways to strengthen financial literacy?

Peter: Well, education is clearly the most important thing to do. But I find it’s important for people to actually understand why they are taking the time to educate themselves. And to do that, you have to understand why it’s important to start saving today for retirement in the future. So let’s take an example: Let’s say you are 30 years old and at today’s spending rate you spend $30,000 a year to support yourself and/or your family. In 36 years at a 2% inflation rate it just turns out that this $30,000 would probably be $60,000. So if you needed to have $60,000 actually after tax how much principal would you need at a 4% after tax return? That would be $1.5 million. So if you think about it, how much money would you have to save each year to actually get to $1.5 million, assuming some rate of return over time. When you start to think about those things you start to realize that saving is actually important and I literally have to do that as soon as possible, as opposed to wait until I’m 50. Or wait until I’m 60. And try to do it in 6, 10, or 15 years time. Because then it’s really hard to do. So once you got that model in mind and you start to understand the significance of having to build a retirement account that is going to produce a rate of return you can actually then use to live on, then it starts to become more serious. And then you’ll spend the time to actually think about, what do I invest in? And what kind of risk do I take? And what kind of return do I expect? And how long do I expect to live after 66? And do I expect to use the principal amount or just earn the interest on the principal amount? All those decisions now start to become real. So that’s why people don’t spend that much time thinking about retirement. Because 1, it’s way off in the future and you assume well, it’s off in the future and I can worry about it then. And 2, it’s a little complex. It’s not so simple. Therefore, make the problem tangible for yourself. Sit down with a pencil and a piece of paper and say: How much money would I need? And how would that actually work? And then start to think, how do I educate myself and solving that problem.