A 40-year career seems like plenty of time to save for retirement when you're new to the workforce. But ask many workers in their 50s and 60s and they'll tell you it's not as long as you might think. Many regret putting off saving for retirement as long as they did, and some work longer than they expected to make up for it.
It might not seem worth saving for retirement if you only have a few dollars to spare at the end of the month, but that's not true. Here's why you should start saving as soon as you can, no matter the size of your contributions.
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Your dollars are worth more than their face value today
You invest your retirement savings, ideally for decades, before you withdraw them to cover your expenses. They'll grow during this time if you've made wise investments, with your earliest contributions having the greatest earning potential.
Consider this: A single $100 retirement contribution that earns an 8% average annual return would be worth $108 after one year. But the next year, it'd grow to $117 and the gains get bigger and bigger over time, as shown in the table below:
$100 Investment Earning an 8% Average Annual Return for: | Will Be Worth: |
|---|
1 year | $108 |
2 years | $117 |
5 years | $147 |
10 years | $216 |
15 years | $317 |
20 years | $466 |
25 years | $685 |
30 years | $1,006 |
35 years | $1,479 |
40 years | $2,172 |
Calculations by author.
Obviously, this isn't going to be a sum you can retire on. But it illustrates the fact that you don't need to make large monthly retirement contributions if you have time on your side. That one $100 contribution grows to be worth 21 times its initial value after being invested for 40 years.
If you delay retirement contributions until you have larger amounts to contribute, you make your job a lot harder. Your money has less time to grow, so you'll have fewer investment earnings to count upon in retirement. You'll have to make up the difference by either setting aside larger portions of your income in the future or working longer.
Say you began saving for retirement at 25 and plan to retire at 65. You think you'll need to save $1 million to cover what Social Security won't. You could reach that goal by saving just $311 per month, assuming you earn an 8% average annual return. But if you waited just 10 years longer to begin saving, you'd have to save $710 per month -- more than twice as much.
How to build your retirement savings habit
It's best to make regular monthly retirement contributions if you're able to do so. This is straightforward if you have a 401(k) because you can elect to defer money from each paycheck. Those who save in IRAs may be able to set up monthly transfers from a linked bank account.
Ideally, you'd have worked out how much you need to save for retirement and you'd be able to save this much each month. But this isn't the case for everyone. If you're not able to save as much as you'd like, start with what you can afford to set aside, even if it's just $5 or $10 a month. As your income increases, increase your retirement contributions first until you reach your goal.
You'll need to reevaluate your retirement savings target every year or so to make sure you're still on track. If you're behind where you'd like to be, you may have to either step up your contributions in future years or consider delaying retirement a little bit to give yourself some time to catch up.
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