Why is retirement planning so commonly recommended?
1) People aren't always going to be able to do their occupation, or their desired hobby. 2) Government assistance, or whatever you want to call it, is available at a certain age. Some people look forward to this and plan to rely on it, but it isn't really sufficient for living off of and keeping the standard of living you will be used to. Therefore, such situations require you to plan using a variety of other institutions to help you in that time. Finally, more is more: if your retirement funds exceed what you need, you can leave something for your family to help them start at a more stable financial place after you are gone. You don't have to retire. But the US government and other national governments have programs that allow you to set aside money when you are young to be used when you are older.  To encourage you to do this, they reduce your taxes either now or when your are older. They also allow your employer to match your funds. In the US they have IRAs, 401Ks, and Social Security.  You are not required to stop working while tapping into these funds. Having a job and using these funds will impact your taxes, but your are not forbidden from doing both. Decades ago most retirement funds come from pensions and Social Security. Most people are going to reach their senior years without a pension, or with only a very small pension because they had one in one of their early jobs. So go ahead, gamble that you will not need to save for retirement. Then hope that decades later you were right about it, because you can't go back in time and fix your choice.  Some never save for retirement, either because they can't or they think they can't. Many that don't save end up working longer than they imagined. Some work everyday until they die, or are physically unable to work. Sometimes it is because they love the job, but often it is because they cannot afford to quit. In addition to what others have said, I think it is important to consider that government retirement assistance (whatever it is called in each instance) is basically a promise that can be revoked. I talked to a retired friend of mine just yesterday and we got onto that subject; she mentioned that when she was young, the promise was for 90% of one's pay, paid by the government after retiring. It is very different today. Yes, you can gamble that you won't need the saved money, and thus decide not to save anything. What then if you do end up needing the money you did not set aside, but rather spent? You are just now graduating college, and assuming of course that you get a decently-paying job, are likely going to have loads more money than you are used to. If you make an agreement with yourself to set aside even just 10-15% of the difference in income right from the start, that is going to grow into a pretty sizable nest egg by the time you approach retirement age. Then, you will have the option of continuing to work (maybe part-time) or quitting in a way you would not have had otherwise. Now I'm going to pull numbers out of thin air, but suppose that you currently have $1000/month net, before expenses, and can get a job that pays $1800/month net starting out. 10-15% of the difference means you'll be saving around $100/month for retirement. In 35 years, assuming no return on investment (pessimistic, but works if returns match inflation) and no pay rises, that will still be over $40K. That's somewhere on the order of $150/month added to your retirement income for 25 years. Multiply with whatever inflation rate you think is likely if you prefer nominal values. It becomes even more noticable if you save a significant fraction of the additional pay; if you save 1/3 of the additional money (note that you still effectively get a 50% raise compared to what you have been living on before), that gives you a net income of $1500/month instead of $1800 ($500/month more rather than $800/month more) which grows into about $110K in 35 years assuming no return on investment. Nearly $400 per month for 25 years. $100 per week is hardly chump change in retirement, and it is still quite realistic for most people to save 30% of the money they did not have before. "Another thing that ""retirement"" lets you do is do what you love without worrying about making enough money to live on by doing it.  For example, volunteering your time or starting your own business.  These are much easier to do when you don't have to worry about getting paid. Having a source of income provides a lot more freedom to pursue what you love." If you can afford it, there are very few reasons not to save for retirement. The biggest reason I can think of is that, simply, you are saving in general. The tax advantages of 401k and IRA accounts help increase your wealth, but the most important thing is to start saving at an early age in your career (as you are doing) and making sure to continue contributing throughout your life. Compound interest serves you well. If you are really concerned that saving for retirement in your situation would equate to putting money away for no good reason, you can do a couple of things: Save in a Roth IRA account which does not require minimum distributions when you get past a certain age. Additionally, your contributions only (that is, not your interest earnings) to a Roth can be withdrawn tax and penalty free at any time while you are under the age of 59.5. And once you are older than that you can take distributions as however you need. Save by investing in a balanced portfolio of stocks and bonds. You won't get the tax advantages of a retirement account, but you will still benefit from the time value of money. The bonus here is that you can withdraw your money whenever you want without penalty. Both IRA accounts and mutual fund/brokerage accounts will give you a choice of many securities that you can invest in. In comparison, 401k plans (below) often have limited choices for you. Most people choose to use their company's 401k plan for retirement savings. In general you do not want to be in a position where you have to borrow from your 401k. As such it's not a great option for savings that you think you'd need before you retire. Additionally 401k plans have minimum distributions, so you will have to periodically take some money from the account when you are in retirement. The biggest advantage of 401k plans is that often employers will match contributions to a certain extent, which is basically free money for you. In the end, these are just some suggestions. Probably best to consult with a financial planner to hammer out all the details. "I suggest that you think in terms of ""financial independence"" rather than retirement. You do not need to retire in the stereotypical sense of playing golf and moving to Florida.  If you reach a point where your ""day job"" does not need to pay your bills, you open up more options for what you can do. I am not saying to wait until retirement to do something you love. I am saying that lower salary requirements open up more options." I like many of the answers, but here is a summary of reasons: Almost everyone will retire, and it is almost certain that government or company pensions schemes will not alone give you a lifestyle you would like in retirement. Money invested early is worth much more in retirement than money invested late, thanks to the miracle of compound interest. In some countries there are tax advantages to investing a little bit of money every year, compared with nothing for a few years and then a lump sum later. Much investment advice is given by investment consultants, who profit when you make investments. It's always in their interests to have you invest as early and as often as possible (that doesn't invalidate the first three reasons). Having said that, it isn't always in your best interests to invest in retirement funds very heavily at the start of your career. You might want to consider paying off any debts, or saving for a house, or even having a bit of fun while you are young enough to enjoy it. That back-packing trip to Nepal is going to be a lot easier when you are 23 than when you are 40 with kids. "In addition to the choice that saving for retirement affords - itself a great comfort - the miracle of compounding is so great that even if you chose to work in old age, having set aside sums of money that grow will itself help your future.  The are so many versions of the ""saving money in your 20s"" that equals millions of dollars that the numbers aren't worth showing here. Still, any time value of money example will illustrate the truth.  That said, time value of money does start with the assumption that a dollar today is worth more than a dollar tomorrow. Inflation, after all, eats away at the value of a dollar. It's just that compounding so outshines inflation that any mature person who is willing to wait, should be convinced. Until you work the examples, however, it's not at all obvious.  It took my daughter years to figure out that saving her allowance let her get way better stuff. The same is true of everyone." I actually really like the way you positioned this question. If you love what you are doing every day, why would you ever want to quit, right? I'd think of retirement as a safety net instead. Your retirement can be a fall back for if something happens if you are unable to work or deicide to work less. There are some really good answers listed here, but I think it depends on how you want to view, or rather define retirement.
"First of all, kudos for thinking about budgeting at 21 years old.  So many people don't plan with their money, and years later wonder where it all went. You are doing a lot of things right with your budget.  You've got saving goals, namely your next car and a down payment on a house.  You are saving almost 20% of your income for retirement, which is amazing. I like the luxury fund, too.  It is good to put some money aside that you can spend on whatever you want, guilt free, because you know that everything important is already planned for. When it comes to budgeting, one thing to remember is that your budget does not have to be perfect, and it is not set in stone.  If you find that your amount for ""living costs"" (which I'm assuming includes things like food, utilities, and rent) is too low, you can allocate more money to it and reduce something else.  There is no need to feel bad if you end up having to change some things around in the budget. Congratulations on being debt free!  I would encourage you to stay out of debt.  Keep the credit cards paid in full each month, and save up for your next car so you can pay cash for that, too. Another saving goal that I would recommend adding to your budget would be an emergency fund.  This is basically a pile of cash that is available to you in case something unexpected and urgent comes up that you haven't planned for.  By having the emergency fund in place, you won't be forced to go into debt due to an emergency.  The amount recommended is usually 3 to 6 months' worth of your expenses." "I'm an American so I don't claim to know anything about Scottish tax law. But just based on what you say above: First, think about how it would work if there were no taxes. If you make a payment against the mortgage, you save 5% in interest. If you put money into a retirement account, you make whatever the profits are on the investment. If that amount comes to more than 5%, then you are better of investing in the retirement account. If it's less than 5%, you are better off paying off the mortgage. As most investments pay significantly better than 5%, this is the superior strategy. On the other hand, apparently you are paying a variable-rate mortgage, but still, mortgage rates are relatively stable. Investment returns vary all over the place and can be negative. So if you are very cautious, that's a reason to pay off the mortgage rather than invest. The younger you are, the less of a concern this should be, as in the long term, investments pretty much always recover lost ground. If you were planning to retire next year I'd have very different advice than if you are planning to retire in 30 years. But sadly, you do have to pay taxes, and that needs to be factored in. So you say that you would have to pay 25% dividend tax on any money you used to pay the mortgage. But the effective tax rate on the retirement money is 15%. So in effect money put against the mortgage pays a 25% tax, and so effectively generates only 5% * .75 = 3.75%. But money invested in the retirement plan pays only 15% tax, and so if the investment returns 3.75% / .85 = 4.4% it would give the same effective return. So if you can invest in something that gives returns of at least 4.4% per year, you're better off putting into the retirement plan than paying off the mortgage. There may be other Scottish tax implications I don't know about. As to ""Substantially less paperwork"", I have no idea how much paperwork is involved in putting money into a retirement account in Scotland. Here in the U.S., you basically call a financial management company of one sort or another and say ""hey, I want to open a retirement account with your company"", and they'll prepare most of the forms for you and you just sign them. It could be done with half an hour of your time. Of course the more you research different investment options, etc, the more time it will take. ""More flexible e.g. if I want to retire early"" If there are restrictions on when you can withdraw money from a retirement account and receive that 25% freebie you mentioned, yes, this could be a factor. Again, I don't know Scottish tax law, there may be other considerations. Here in the U.S., there's a 10% tax penalty if you withdraw money from a retirement account before the legal retirement age. Realistically that's a minor issue, if you have money in there for several years the tax benefits will be more than 10%. But yeah, it would be stupid to put money in in December and then take it out the following January and have to pay the 10% penalty. ""Doesn't incur the risk that the government will change the pension rules between now and when I retire"" Maybe. But then laws might change in your favor, too. And as you indicated that your mortgage interest rate could change, there could be risk on that side too. That all comes down to what you think the risks are all around." "Almost all companies in the US have changed from formal pension programs to 401k plans, and most companies that still have pension programs don't allow new employees to  enroll in the new program; only the previous participants who are vested in the pension plan will get benefits while new employees get enrolled in the 401k plan. If this is the case with  your prospective employer, then demanding that you be allowed to enroll in the pension plan is likely to be futile; in fact, the likely response may well be ""Here is our offer. Take it or leave it"" or ""We are withdrawing  the offer we made"" especially if you are in a field where there are plenty of other people who could do the job instead of you. So be sure that you understand what your worth is to the company and how much leverage you have before starting to make counter-offers. With regard to money that you might have vested in your current employer's pension plan, your options are to leave it there until you retire and start getting a pension (generally not advisable in these parlous times when the company might not even exist by then), roll it over into an IRA or into your new employer's 401k plan. This last is the only matter that concerns your prospective employer and where you might need to ask; the new employer's 401k plan might not be structured to accept rollovers. If the money in your current employer's retirement plan is in a pension plan, what is paid out for rolling over might be different (and smaller) than what has been credited to you thus far. For example, my (State Government) pension plan credited 8% interest per annum on the amounts I contributed but this was fake money because had I resigned and withdrawn the pension contributions (for the purpose of rolling over into an IRA or even just taking it as cash), I would have received only my contributions plus only 4.5% interest per annum. The 8% interest credited is available only for the purpose of the purchase of an immediate annuity upon retirement; it is not something that is portable to a new plan, and if I want a lump-sum payout upon retirement instead of a pension in the form of an annuity, it would be the 4.5% rate again..." "Been here in Japan 12 years mate, and you're right, the investment options here suck. Be very wary of them, they will take all your money in outrageous fees--3% in and 3% out of some ""investment"" options. It's a scam. Send the money back home and manage it there. I recommend setting up a Vanguard account back in the UK, then you can invest in Vanguard index funds. Vanguard charges no commission for buying and selling their funds when you have a Vanguard account. I have nearly all my money there (Vanguard US), and I use the free Personal Capital online software to understand how to best manage the allocations in my portfolio. Of course you'll lose a bit of money on wire transfer fees, but you'll more than make up for it if in the long-term, and they may also be offset by currency rate anyway (right now the yen is strong, so a good time to use it to buy GBP). Also you may never need to send the money back to Japan unless you plan on retiring here." "There is no rule-of-thumb that fits every person and every situation.  However, the reasons why this advice is generally applicable to most people are simple. Why it is good to be more aggressive when you are young The stock market has historically gone up, on average, over the long term.  However, on its way up, it has ups and downs.  If you won't need your investment returns for many years to come, you can afford to put a large portion of your investment into the volatile stock market, because you have plenty of time for the market to recover from temporary downturns. Why it is good to be more conservative when you are older Over a short-term period, there is no certainty that the stock market will go up.  When you are in retirement, most people withdraw/sell their investments for income.  (And once you reach a certain age, you are required to withdraw some of your retirement savings.)  If the market is in a temporary downturn, you would be forced to ""sell low,"" losing a significant portion of your investment.   Exceptions Of course, there are exceptions to these guidelines.  If you are a young person who can't help but watch your investments closely and gets depressed when seeing the value go down during a market downturn, perhaps you should move some of your investment out of stocks.  It will cost you money in the long term, but may help you sleep at night. If you are retired, but have more saved than you could possibly need, you can afford to risk more in the stock market.  On average, you'll come out ahead, and if a downturn happens when you need to sell, it won't affect your overall situation much." "There are several types of financial advisors. Some are associated with brokerages and insurance companies and the like. Their services are often free. On the other hand, the advice they give you will generally be strongly biased toward their own company's products, and may be biased toward their own profits rather than your gains. (Remember, anything free is being paid for by someone, and if you don't know who it's generally going to be you.) There are some who are good, but I couldn't give you any advice on finding them. Others are not associated with any of the above, and serve entirely as experts who can suggest ways of distributing your money based on your own needs versus resources versus risk-tolerance, without any affiliation to any particular company.  Consulting these folks does cost you (or, if it's offered as a benefit, your employer) some money, but their fiduciary responsibility is clearly to you rather than to someone else. They aren't likely to suggest you try anything very sexy, but when it comes to your primary long-term savings ""exciting"" is usually not a good thing. The folks I spoke to were of the latter type. They looked at my savings and my plans, talked to me about my risk tolerance and my goals, picked a fairly ""standard"" strategy from their files, ran simulations against it to sanity-check it, and gave me a suggested mix of low-overhead index fund types that takes almost zero effort to maintain (rebalance occasionally between funds), has acceptable levels of risk, and (I admit I've been lucky) has been delivering more than acceptable returns. Nothing exciting, but even though I'm relatively risk-tolerant I'd say excitement is the last thing I need in my long-term savings. I should actually talk to them again some time soon to sanity-check a few things; they can also offer advice on other financial decisions (whether/when I might want to talk to charities about gift annuity plans, whether Roth versus traditional 401(k) makes any difference at all at this point in my career, and so on)." John Bogle never said only buy the S&P 500 or any single index Q:Do you think the average person could safely invest for retirement and   other goals without expert advice -- just by indexing? A: Yes, there is a rule of thumb I add to that. You should start out   heavily invested in equities. Hold some bond index funds as well as   stock index funds. By the time you get closer to retirement or into   your retirement, you should have a significant position in bond index   funds as well as stock index funds. As we get older, we have less time   to recoup. We have more money to protect and our nervousness increases   with age. We get a little bit worried about that nest egg when it's   large and we have little time to recoup it, so we pay too much   attention to the fluctuations in the market, which in the long run   mean nothing. How much to pay Q: What's the highest expense ratio that one should pay for a   domestic equity fund? A: I'd say three-quarters of 1 percent maybe.   Q: For an international fund?  A: I'd say three-quarters of 1 percent.   Q: For a bond fund? A: One-half of 1 percent. But I'd shave that a little bit. For   example, if you can buy a no-load bond fund or a no-load stock fund,   you can afford a little more expense ratio, because you're not paying   any commission. You've eliminated cost No. 2.... I'm going to diverge from most of the opinions expressed here. It is common for financial advisors to assume that your portfolio should become less risky as you get older.  Explanations for this involve hand-waving and saying that you can afford to lose money when young because you have time to make up for it later.  However, the idea that portfolios should become less risky as you get older is not well-grounded in finance theory.  According to finance theory, regardless of your age and wealth, returns are desirable and risk is undesirable.  Your risk aversion is the only factor that should decide how much risk you put in your portfolio. Do people become more risk averse as they get older?  Sometimes.  Not always.  In fact, there are theoretical reasons why people might want more aggressive portfolios as they age.  For example: As people become wealthier they generally become less risk averse. Young people are not normally very wealthy. When you are young, most of your wealth is tied up in the value of your human capital.  This wealth shifts into your portfolio as you age. Depending on your field, human capital can be extremely risky--much riskier than the market.  Therefore to maintain anything like a constant risk profile over your life, you may want very safe investments when young.  You mention being a hedge fund manager.  If we enter a recession, your human capital will take a huge hit because you will have a hard time raising money or getting/keeping a job.  No one will value your skills and your future career prospects will fall. You will not want the double whammy of large losses in your portfolio. Hedge fund managers are clear examples of people who will want a very safe personal portfolio during their early working years and may be willing to invest very aggressively in their later working and early retirement years. In short, the received wisdom that portfolios should start out risky and get safer as we age is not always, and perhaps not even usually, true.  A better guide to how much risk you should have in your portfolio is how you respond to questions that directly measure your risk aversion.  This questions ask things like how much you would pay to avoid the possibility of a 20% loss in your portfolio with a certain probability.