If someone walked up to you and asked you to give them $600 today and in exchange, they’d give you $8,400 at a later date, you probably wouldn’t say no. But people pass up opportunities like this all the time. They just don’t realize it.
Retirement can seem far off, and if you still have decades left in the workforce, saving for it might not seem as pressing as buying the things on your want list today. But waiting even one year to begin saving for retirement can make your job a lot harder.
Don’t believe me? Let’s look at the evidence.
The real costs of waiting a year to start saving for retirement
The value of your retirement accounts depends on a few factors: how much you contribute, your investment rate of return, and how long the money’s been sitting in your account. The more you contribute, the better those investments perform, and the sooner you start saving, the more you’ll have when it’s time to retire. No one has any trouble understanding these first two principles, but many underestimate the power of the third.
Let’s consider two different people. One is 25 and one is 26 and both plan to retire at 65. Each contributes $50 per month to their retirement account, earning a 7% annual rate of return. At 65, the person who started saving at 26 would have about $111,000, while the person who started saving at 25 would have nearly $120,000. That’s a difference of nearly $9,000.
Double the contribution rate and you double the difference between the two retirement balances. Keeping all other factors the same, a $100 monthly contribution would net the person who started saving at 25 around $240,000, while the person who waited until 26 would only have about $223,000 — nearly $17,000 less.
If you hope to retire comfortably, you’ll have to set aside more than $100 per month, so let’s try a more practical scenario. The median salary in the United States is $47,060, according to the latest Bureau of Labor Statistics data. If you’re trying to save 15% of that income for retirement, that amounts to about $7,059 per year, or about $588 per month. Using the same rate of return and saver ages as the previous example, we end up with a difference of almost $99,000. The saver who started at 25 would have a final balance of $1,409,000, while the person who began saving at 26 would only have $1,310,000.
The difference in the above examples is so extreme because of the length of time the savings have to compound — 39 and 40 years. If you only have 20 years left until retirement, delaying one year may not hurt your final balance as much because that extra year of savings would have had fewer years to compound than our previous examples. But it would still impact your final balance, and you’d have to set aside more money each month if you wanted to retire with a comfortable amount.
How to start saving for retirement now
The first step is to open a retirement account if you don’t have one already. Your employer may offer a 401(k). Begin here, especially if your company matches some of your contributions. You may contribute up to $19,000 to a 401(k) in 2019 or $25,000 if you’re 50 or older.
If your employer doesn’t have a 401(k) or you’re not eligible, open an IRA instead. Contribution limits are lower. You can only contribute up to $6,000 to an IRA in 2019 or $7,000 if you’re 50 or older.
Use a retirement calculator to estimate how much you’ll need to cover your retirement expenses and how much you’ll need to save each month to hit your goal. Try to save at least this much, if you can. If not, contribute as much as you can now. As our first example showed, even $50 a month can add up to hundreds of thousands of dollars over time.
Look for opportunities to increase your savings. Try reducing how much you spend on discretionary purchases each month or find ways to increase the money you have coming in. This could involve starting a side business or working overtime at your existing job. Consider stashing your tax refund or your yearly bonus in an IRA, as well. If you get a raise, raise your retirement contributions before doing anything else.
You may not feel that you can afford to contribute much toward retirement today, but every dollar you set aside and every day that money sits in your retirement account matters. Take advantage of the time you have left to set yourself on track for your best possible retirement.