A quote often attributed to Mark Twain is, “The two most important days of your life are the day you were born and the day you find out why.” But in the modern era, the day you start saving for your retirement can be a contender for the next place on the list. According to a recent study, too many workers postpone the day for too long – and this is a mistake that could end up costing them $ 500,000.
The Q4 2020 Retirement Security Survey, sponsored by financial manager and insurance company Principal, find that people at an average age of 32 contribute to their retirement pension plan. This is understandable for the saver who does not lock up a full-time job until old age. But it is an expensive delay for those in their mid-20s to follow the more common path of working full time.
Image Source: Getty Images.
If you start saving in your twenties
Here are the numbers. According to the U.S. Bureau of Labor Statistics, the average annual salary for a 25- to 34-year-old employee is $ 47,736. And according to the Planning Board of America, the average contribution rate in 401 (k) plans is 12.9%. These numbers equate to retirement contributions of about $ 6,150 per year. A 32-year-old who wants to retire at 65 has 33 years to invest the contributions. Assuming the retirement portfolio matches the long-term stock market average of 7% after inflation, the savings balance at retirement will be around $ 730,000.
This amounts to $ 29,200 in annual retirement income, assuming that this saver will withdraw 4% each year.
But what if a pensioner started saving earlier, say at the age of 25? You might be shocked at the difference that is only going to make seven years. Under the same assumptions, the balance at retirement is nearly $ 500,000 more, or just under $ 1,228,000. The amount would support annual withdrawals of $ 49,120, almost $ 20,000 more than the original scenario.
The takeaway should be clear: your 20s is the best time you can get out of your savings contributions. The money you set aside early in your career has four decades to grow. If you invest in the stock market, it’s enough time for every $ 1 that contributes to $ 15 or $ 16. Twenty years later, you only have time to grow every $ 1 to $ 3 or $ 4.
If you are over 30
Suppose your 20s passed you by without a penny in a 401 (k). Now what? A comfortable retirement is still within your reach as long as you are willing to fund a risky contribution rate. For example, if you start saving at 32, you should save about $ 10,000 annually to reach the $ 1,228,000 milestone. At a salary of $ 48,000, that’s 21% of your salary, including your employer match. Wait until you are 42 and your total contribution should be 40%.
These numbers are not responsible for annual salary increases or inflation, but these factors can often offset each other anyway. Therefore, it is dangerous to save until you earn more. Saving does not get easier over time, even if your salary increases, because your cost of living is likely to increase as well.
Start early to finish strong
Another well-known quote is: “The secret of progress is to get going.” And that may be the best retirement savings advice out there. Start contributing regularly to a retirement account today – a 401 (k) if you have one or an IRA. It’s a decision that can ultimately add six figures to your retirement savings balance.