Is Time on Your Side?

This stunning article from Yahoo! Finance describes in detail the difficult situation that many people in their fifties and sixties find themselves in. From the article:

Thirty-four percent of workers have nothing set aside for retirement, according to the U.S. Social Security Administration. A study by the National Institute on Retirement Security found 40 percent of workers 55-65 years old do not own assets in a retirement account.

The article goes on to list some suggestions for people who find themselves in this situation.

While I certainly sympathize with people who find themselves pushing toward retirement age without anything in the bank, this article should be a wake-up call for any professional adult.

Right now, I’m in my mid-thirties. A “typical” retirement age is thirty years away for me. I have a strong sense that I have plenty of time to save.

So did they.

The reality is that it will never, ever be easier to save for retirement than it is right now. We’ve all heard that “there’s no better time than the present,” but that’s strongly true for retirement savings.

I’ll use myself as an example. Let’s say I’m going to retire at age 68, hypothetically. Let’s also say that I need to save $500,000 (I’ll probably need more, but we’ll use that nice even number for calculations below).

In reality, I started saving for retirement at age 23. Starting at that age gives me 45 years worth of breathing room. Assuming I would collect 26 checks per year, that means I have 1,170 paychecks to withdraw from. I can divide what I need to save into 1,170 equal chunks.

Let’s say I waited until 38 to start. Starting at that age gives me only 30 years to save. Again, assuming I have 26 checks per year, that means I have only 780 checks to withdraw from. I have to take 50% more out of each paycheck just to match the total savings.

What if I waited until 48? Starting at that age gives me only 20 years to save. Again, assuming I have 26 checks per year, that means I have only 520 checks to withdraw from. I have to take 125% more out of each paycheck just to match my total savings if I had started from age 23.

What if I waited until 58? Starting at that age gives me only 10 years to save. Again, assuming I have 26 checks per year, that means I have only 260 checks to withdraw from. I have to take 250% more out of each paycheck just to match my total savings if I had started from age 23.

And it gets worse.

Over the long term, you can assume that the stock market will return an average of 7% per year, according to Warren Buffett’s projections for the future.

When you’re 23, every dollar you put into retirement during that first year turns into $21 by the time you’re 68.

If you don’t start until you’re 38, every dollar you put into retirement during that first year turns into only $7.61 by the time you’re 68.

At 48? Every dollar becomes only $3.87.

At 58? Every dollar saved becomes only $1.97.

The reality is that the earlier you start, the better numbers work in your favor. If you start at age 23, you can save only $100 out of each paycheck – adding up to $2,600 per year – and you’ll have $800,000 saved up when you retire.

At age 38, if you start then and take out only $100 each paycheck, you’ll only have $260,000 saved up.

At age 48? Start then and take out only $100 per paycheck and you’ll only have $115,000 saved.

Start at age 58, and you’ll only have $38,000 at retirement. Ouch.

The only difference between those scenarios is how early you start. The earlier you start, the easier it will be.

Now, let’s say that you have to have $1 million saved up at retirement age. Same scenario – 26 paychecks per year, 7% annual returns.

If you start at age 23, you only need to save $125 per paycheck.

If you start at age 38, you’ll need to save $380 per paycheck. Yes, this is going to get scary.

If you start at age 48, you’ll need to save $875 per paycheck.

If you start at age 58, you’ll need to save $2,600 per paycheck. Let that sink in.

Here’s another reality: it will never get easier to save. You might hold visions of your future self being more responsible and having more income, but it’s impossible to predict what might happen in the future.

The only thing that’s certain is what you’re doing right now. Your future is unknown. The only thing that’s certain about it is that you’ll have to save more per week for retirement if you wait around to start.

There will never, ever be a better moment to start saving for retirement. There will never, ever be a better moment to bump up the percentage you’re saving, either. You’ll never have more time for it to grow. You’ll never have more pay periods with which to divide up your savings responsibilities.

Don’t let your future be like the ones in this article. Take control.

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