Yes, you! Yes, right now! Maybe you don’t think you can afford to save for retirement. Maybe you’re still young and think you have plenty of time before you have to worry about retirement. Maybe you don’t plan on ever retiring. Let me tell you why you should be saving now anyway. This is especially for you young folks, like me.
According to the U.S. Government Accountability Office as of 2016, average Americans between the ages of 55 and 64 have about $104,000 saved for retirement. If you’re using the 4% rule, that translates to only $4,160 per year or $347 per month in income. That’s not going to cut it. Sure, they may be relying on Social Security benefits, but I’d rather not base my entire retirement on this system. Plus, I plan on retiring way before Social Security kicks in.
Saving now is critical to maximizing your nest egg by the time you want to retire. This gives more time to let compound interest build your stash.
How many times has someone older than you told you “I wish I did X when I was your age?” Probably hundreds of times! Savings is one of those things that you should really pay attention to now.
Running the Numbers
Let’s look at the difference between someone who started saving for retirement in their 20s versus someone who started saving in their 40s. And let’s say they both plan on retiring by the traditional age of 65.
Tasha is 23 years old, just graduated from college and landed her first job. She continues living like a college student and decides that she can now afford to start putting $400 per month away for retirement. Here’s the trajectory of her $400 per month from now until she is 65.
Tasha ends up contributing $201,600 to her retirement accounts and assuming 7% interest on her investments, she ends up with $1,217,483. Using the 4% rule, she is able to draw down $48,699 per year or $4,058 per month! Sounds like a pretty cushy retirement to me. And this does not include any Social Security benefits that she may receive.
Now let’s look at Mary. Mary is 40 years old and has been in her career for a while now. She has had some salary increases and is now thinking about aggressively saving for retirement. Before, she was only contributing ~$50 per month to her retirement accounts, so she starts off with $19,506. Then she ups her contributions and starts saving $800 per month. Here are her numbers assuming the same 7% return on her investments.
Mary ends up with only $759,737 when she is 65 even though she has contributed $250,200 in principal to her accounts ($240,000 after age 40, plus the $50 per month, or $10,200 that grew to $19,506 by the time she was 40). This translates to only $30,289 per year or $2,532 per month. Not bad, but saving more earlier would have gotten her better results. Even though she contributed almost $50,000 more than Tasha, Tasha ends up with $457,746 more than Mary!
Still not convincing enough?
Personally, as of today, my nest egg sits at $77,100. If I decided that I didn’t want to retire early and I stopped saving today here’s what my chart would look like for 39 years of growth at 7%.
I’d still beat out Mary and have almost as much as Tasha. I could withdraw $46,913 per year and have a monthly income of $3,909! So I’m all set for old age, but given that my goal is to retire early, I’ll keep on saving.
The moral of the story is that the longer you wait, the less money you will have to work with at retirement. And the more you save now, the sooner you will be able to have the freedom of retiring early, or just letting your savings ride while you focus on other things that are important to you.
For those that think they are too young to worry about this yet, I hope the information provided above changes that. For those that don’t think they can afford it, check out my last post on saving before you even get paid. You’d be surprised at how much you can save if you can do so pre-tax. And for those that don’t plan on ever retiring, there are still plenty of reasons why you should be saving in case of illness, injury, or any future change of plans that may affect your ability or willingness to work.
Here’s a link to the calculator I’m using to generate these results, which also provides more detail on the underlying assumptions. Plug in your numbers and play around with it to see what you can expect.
Things I left out:
- Taxes! If you save in tax deferred accounts (like a 401k, HSA, or traditional IRA) then you will have to pay taxes on your withdrawals. But if you’re only saving $400 per month like Tasha and make less than $117,000 per year you can contribute all of that to a Roth IRA. A Roth IRA is a post-tax account (pay taxes on the money going in, but none coming out) with a limit of $5,500 per year or $6,500 per year if you’re over 50 years old. I’ll cover IRAs more in a later post.
- There are ways to avoid paying taxes out of your tax deferred accounts as well, which I also hope to touch on in the future.
- “Why are you using 7% returns? That’s ridiculous!” Actually, it’s not and it includes inflation. But even if it was, that’s motivation to save even more.
What do you think about Tasha’s and Mary’s saving strategies? Are you on track for when you’re expecting to retire?