When it comes to saving for retirement, time is on your side
Eileen St. Pierre, The Everyday Financial Planner
It’s hard to convince young people to start saving for retirement. Saving money is so boring, especially if you are not going to need it until, like, forever. There are more exciting things to spend money on like a new car, clothes, and the latest iPhone. But they may be more inclined to start saving for retirement once they see the power of compounding.
Here are the numbers:
A recent college grad signs up for her company’s 401(k) plan at age 22. She has $250 a month ($3,000 a year) taken out of her paycheck. For now, let’s ignore the money she will save on income taxes from making her monthly 401(k) contributions and any match her company may give her. Her contribution stays the same until she reaches her full retirement age of 67. So she is setting money aside for 45 years.
- If her savings are invested at 6%, she will have $689,000 by the time she retires.
- If she invests a bit more aggressively (i.e., puts a little more money in stocks) and earns 8% a year, her retirement account will grow to $1,318,635 by age 67.
Now let’s say she blows off saving for retirement until age 37. Feeling guilty, she signs up for her company’s 401(k) and starts saving $250 a month out of her paycheck. When she retires in 30 years at age 67, how much will she have in her retirement account?
- If her savings are invested at 6%, she will have $251,129 by the time she retires. She loses $437,871 by waiting to save for retirement. To get the $689,000 balance as our 22-year old, she would need to save $686 a month ($8,232 a year).
- If she invests a bit more aggressively and earns 8% a year, her retirement account will grow to $372,590, a staggering $946,045 less than if she started saving right out of college. To get the $1,318,635 balance as our 22-year old, she would need to save $885 a month ($10,620 a year).
The bottom line:
The longer you wait to start saving for retirement, the more you will have to invest per month and the more risk you will have to take with your money. There are a lot of unknowns that can happen between now and the time you retire:
- You may have periods of unemployment.
- You may switch careers several times.
- You may decide to start your own business.
- You may face unexpected health care costs.
- You may be forced into early retirement.
By starting your retirement savings plan as soon as possible, you will be better prepared to handle these unknowns. Have your retirement contributions taken directly out of your paycheck, checking account, or savings account. Take advantage of any company match. Pay yourself first whenever you get a raise, tax refund, or unexpected cash inflow. Your reward will be a financially secure retirement.