When you got your first “real” job you were probably/hopefully given the opportunity to contribute to a 401(k) plan. If you’re like a lot of entry level workers, you may have chosen to contribute enough to get the full match from your employer. Or maybe you chose not to contribute at all.
If you’re focused on bringing home enough money to pay your rent and student loans that are due like now, you’re probably not also worrying about whether or not you’ll be able to afford to live in some Floridian retirement community in 45 years.
The most widely-recommended savings goal for future-retirees is $1 million. $1 MILLION. That’s a huge amount of money. Sure, you can easily shrug it off because you think you’ll never be able to save that much money anyway, but we’d advise you to think again.
Here’s why you shouldn’t delay saving for retirement:
The earlier you start, the more money you’ll have
Saving $1 million for retirement can be easier than you might think, thanks to our old friend compound interest.
Believe it or not, if you save $4,500 a year over a 45-year career, you could have more than $1 million by the time you retire. If you invest the same amount for only 35-years, you’ll end up with about half that.
Here’s how it works:
Say you made a one-time investment of $5,000 at 6.00% a year. The first year, you’d earn $300 in interest (5,000 x .06). The second year, you’d earn $318 ($5,300 x .06), $337.08 in the third year and so on.
What makes compound interest so special is that the longer you give it, the more powerful it can be. In this scenario, you’d earn $1,600 in interest alone in the 30th year.
Keep in mind that market returns are not guaranteed, and you probably won’t earn a steady 6% for 45 years, but the math shows the benefits of compounding returns over a longer period of time.
Social security won’t fully support you
We all pay into social security with every paycheck whether we like it or not. We all expect to get back at least some of what we put in, but (as you’ve probably heard) the future of social security isn’t looking as hot as it once did.
Let’s say you’re 30, and you make $50,000 a year. You’re awesome at your job (or at least people think you are) and you get enough raises and promotions over the course of your career that when you retire, you’re making significantly more than that. Go you. You’re probably going to get a pretty good chunk from Social Security, right?
Nope. In that situation, you can count on getting about $22,000 a year in Social Security if you retire at 67. And while it’s entirely possible to live on that much, it isn’t ideal.
Not saving is a major regret among retired people
Bankers Life and Casualty Company Center for a Secure Retirement conducted a survey of middle-income retirees in 2012. When asked what advice they would give younger people, 39% of retirees surveyed said young people should save for the future – “Save for retirement, no matter how little money you think you have.”
The top piece of retirement-specific advice they want to pass on to younger generations?
93% said start saving early and 84% said contribute to a retirement plan at work if it’s available.
And just in case you didn’t want to take their advice, when asked what has been the biggest financial surprise about being retired, the top answer was not having enough income.
So with all that being said, what’s our best advice? Start now. Contribute as much as you’re allowed. No excuses. Need help putting together a savings plan? Talk to a financial advisor.