You probably know that you should be saving for retirement. But when it’s so far away, and you have more immediate concerns to worry about, it’s hard to give up a sizable chunk of your earnings for a benefit you won’t realize for decades. After all, you’ll have plenty of time to save for retirement in the future, right?
Maybe. But what most people don’t realize is that every day you put off saving for retirement, you might be increasing the amount of money you will need to set aside from each paycheck in the future. Waiting a few years or a decade to begin saving could be a $100,000 mistake.
Don’t believe me? Take a look at the evidence.
Why you need to start saving for retirement right now
If you had to keep all of your retirement savings in cash, most people would probably never retire because inflation would erode the value of those savings over time. That’s why you invest your retirement funds in assets like stocks and bonds, in order to help them beat the inflation rate and grow over time. Money you contribute when you’re younger matters more because it has more time to grow before you need to begin drawing upon your savings.
To understand what kind of effect this can have, let’s consider a few different scenarios. For each scenario in the table below, we’ll assume that the person earns a 7% annual rate of return on their investments and plans to retire at 65. Here’s how much they would have by the time they retired based on when they began saving and how much they set aside per month for retirement.
Retirement account balances at 65 based on starting age and monthly savings amount
| Starting at Age 25 | Starting at Age 35 | Starting at Age 45 | Starting at Age 55 | |
|---|---|---|---|---|
| Saving $100/month | $239,562 | $119,353 | $49,195 | $16,580 |
| Saving $250/month | $598,905 | $283,382 | $122,986 | $41,449 |
| Saving $500/month | $1,197,811 | $566,765 | $245,973 | $82,899 |
| Saving $1,000/month | $2,395,621 | $1,133,529 | $491,946 | $165,797 |
The table clearly illustrates that the earlier you begin saving, the more your savings will be worth in the end. Some of the above differences come from additional personal contributions. The person who begins saving $100 per month at 25 will end up putting $12,000 more of their own money toward retirement than the person who began saving $100 per month at 35, but they will end up with over $120,000 more in the end. And this difference could be even greater if you set aside more money per month or get a larger rate of return on your investments.
If the person who began saving at 35 wanted to retire with the same amount of money as the person who began saving $100 per month at 25, they would have to save about $211 per month, assuming that the market conditions are roughly the same in both cases. Over 30 years, that adds up to $75,960 in personal retirement contributions. But the person who saved $100 per month over 40 years would only have to set aside $48,000 of their own money for their future. That’s a difference of nearly $28,000.
You’ll probably need to save more than you think
It would be nice if you only needed to save a few hundred thousand dollars for retirement, but $1 million to $2 million is a better ballpark figure for most workers today. The average retirement today is about 18 years and the average household headed by an adult 65 or older spends nearly $50,000, on average. That puts the average retirement close to $900,000, and costs will likely go up as people live longer and inflation makes everything more expensive. Social Security will cover some of this, but you’ll still need plenty of your own personal savings.
You can calculate how much you’ll need for retirement by subtracting your preferred retirement age from your estimated life expectancy to get the approximate length of your retirement. Then, total up your estimated annual living expenses in retirement, keeping in mind that some, like healthcare, may increase while others, like child care, may decrease or disappear. Multiply your estimated expenses by the number of years of your retirement, adding 3% for inflation.
Use a retirement calculator to do this and to estimate your investment rate of return. Your investments could grow as much as 7% to 8% per year, but use 5% to 6% to be conservative. Finally, subtract the money you expect from Social Security, a pension, or a 401(k) match to estimate what you must save on your own. Create a my Social Security account to estimate your Social Security benefit if you’re unsure how much this will be.
Your retirement calculator should tell you how much you must save each month to hit your goal. Do what you can to make this happen, even if it means trimming the fat from your budget. It might seem like you’re giving money up, but you’re actually saving yourself money over the long term, not to mention improving your financial security.
If you absolutely can’t make ends meet, you might have to rethink your retirement age. Delaying retirement a few months or years helps you by giving you more time to save while simultaneously decreasing the cost of your retirement. You could also consider working part-time in the early years of your retirement. This enables you to transition slowly out of the workforce without drawing down your retirement savings too quickly.
Saving for retirement might be less fun than spending that money today, but it’s vital that you start saving as soon as possible. You’ll need this money to cover your basic expenses in retirement and the sooner you start saving, the less of your own money you’ll have to spend on retirement overall.
