Why plan for retirement | Investments and retirement | Financial Literacy | Khan Academy

So let's think a little bit about retirement. I know some of y'all who are younger are like, "Hey, I'm just trying to figure out what to do with my own life. Why am I already thinking about my life when I am in my 60s or 70s or even later?"

The first thing I'll tell you is, life will go by faster than you suspect. I'm not at retirement yet, but I'm about halfway. That first half went awfully fast. More importantly, the earlier you start thinking about it, the more likely you're going to be in a good situation when you get to retirement.

So, the whole principle is when you're in your 60s or 70s, you might not want to work. You might want to see the world a little bit, spend more time with your family, or you might not be in a position to work. Your health might start going in certain ways, and so you want to have a cushion to live off of.

Now, one consideration is that people are living longer and longer, which is a good thing. In the old days, when the life expectancy was 65 or 70 and people retired at 65, on average they only had to think about how they were going to support themselves for those five years. But now, folks are living into their 80s, 90s, and even beyond as healthcare gets better.

So now, if you're fortunate, your retirement might be decades long; it might be 20, 30 years, or longer. That's a double-edged sword because healthcare is getting better, but healthcare is also very, very expensive. You need to think about how to pay for that.

You might have to think about things like inflation—everything is getting more expensive over time. Some of you might say, "Hey, there are government programs, there's government healthcare." You have things like Medicare, you have social security that you're paying into. But you really don't know when you retire in 30, 40, 50, or 60 years whether those programs are going to be the same or to what degree those programs can support you.

So, saving for retirement is a very, very important thing, but some of the core principles that we talk about saving generally apply. You should try to live below your means and spend less than you bring in. You have that savings.

Now, some of that savings could be for things that are in the short term. It could be a safety net in case you lose your job, fall ill, or have unforeseen expenses. It could also be for buying a house or buying a car, and it could also be for investments.

If you start saving and invest now—if that investment's not something you want to touch for 30, 40, or 50 years—you could probably deal with a little bit of ups and downs, what's often called volatility, a little bit of that risk. If you invest over many years, whether it's in something a little bit riskier like stocks or something safer like bonds, that interest compounds year after year.

It will become a significant addition to whatever you directly save over the coming decades. I encourage you to watch videos on Khan Academy about the power of compounding interest and things like that.

If you save a hundred dollars when you're in your 20s and it compounds at four, five, or six percent per year, that will be a lot more than a hundred dollars when you get into your 50s, 60s, and 70s.

So, start thinking about retirement. It's never too early. Worst case, you think about retirement and start saving up for it. That money you're saving up can be used for many, many different purposes depending on how you're saving it.

You also have things like retirement accounts, like 401(k)s and IRAs, which we'll talk about later, that allow you to save for retirement in a very tax-efficient way. We'll talk about that in more depth in other videos.