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 age, the day you start saving for retirement can be a candidate for the next place on the list. According to a recent study, many workers are putting that day off for a long time – and it is a mistake that could end up costing $ 500,000.
The Fourth 2020 Retirement Security Survey, sponsored by the financial manager and the insurance company Director, concludes that people start to contribute to the retirement plan in the workplace with an average age of 32 years. This is understandable for the saver who cannot get a full-time job until that age. But it is an expensive delay for those who follow the most common path of settling into full-time work in their 20s.
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If you start saving in your 20s
Here are the numbers. The average annual salary for a worker aged 25 to 34 is $ 47,736, according to the US Bureau of Labor Statistics. And the average contribution rate for 401 (k) plans is 12.9%, including employer correspondence, according to the Plan Sponsor Council of America. These numbers are equivalent to retirement contributions, totaling about $ 6,150 per year. A 32 year old who wants to retire at 65 has 33 years to invest and increase these contributions. Assuming that the retirement portfolio performs in line with the long-term stock market average of 7% after inflation, the balance of retirement savings will be around $ 730,000.
This equates to $ 29,200 in annual retirement income, assuming that savers withdraw 4% each year.
But what if a retiree started saving earlier, say, at 25? You may be shocked by the difference that just seven years will make. Under the same assumptions, the retirement balance is almost $ 500,000 more, or just under $ 1,228,000. This amount would support annual retirement withdrawals of $ 49,120, almost $ 20,000 more than the original scenario.
The conclusion must be clear: your 20s is the time when you can make the most 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, that’s enough time for each $ 1 contributed to grow to $ 15 or $ 16. Twenty years later, you only have time to increase each $ 1 to $ 3 or $ 4.
If you are over 30
Let’s say your 20 years have passed you by without a penny hidden in a 401 (k). What now? A comfortable retirement is still within reach, as long as you are willing to finance a bold contribution rate. If you start saving at 32, for example, you’ll have to save about $ 10,000 a year to reach the $ 1,228,000 milestone. With a salary of $ 48,000, that represents 21% of your salary, including your employer. Wait until you are 42 and your total contribution rate should be 40%.
These figures are not responsible for annual wage increases or inflation, but these factors can often be compensated for anyway. That is why it is dangerous to postpone the economy until you earn more. Saving doesn’t get easier over time, even as your salary increases, because life expenses are likely to increase as well.
Start early to finish strong
Another famous quote is: “The secret to progress is to start.” And that could 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 is a decision that can ultimately add six digits to your savings balance for retirement.