When you’re first beginning your career, it can be challenging to juggle priorities, and you may end up leaving retirement savings on the backburner. After all, when you got your first job, you probably were still four decades away from retirement. Things like buying a house, getting married, and having kids seemed more important.
Unfortunately, waiting even ten years to start saving for retirement can impact the rate of savings you’ll need to “catch up” and save enough for your retirement goals.
Why does it matter when I start saving for retirement?
It might not seem like a big difference when you start saving if you’re only putting away $100/month, but compounding interest rates can have huge impacts.
For example, an individual who starts saving right away at 18 years old with $100/month would have $438,642 at 65, considering a 7% rate of return and no investment fees. That individual would only invest a total of $56,400 over 47 years, meaning the retirement savings was 87% growth alone.
On the other hand, someone who doesn’t start saving until 28 likely has more income than the 18-year-old and could reasonably double their investment to $200/month. At 65 years old, their retirement savings would only total $419,308 (less than the first individuals!) even though they were saving twice as much every month.
Saving early can have enormous benefits for your retirement down the road. Didn’t start saving at 18-years old? No need to dwell on the past — this Chinese proverb says it all. "The best time to plant a tree was 20 years ago. The second best time is now."
Just like it’s more comfortable to avoid going to the doctor or the gym, it might be easier to ignore your finances and hope they work themselves out. In the long run, this can be detrimental to your retirement.
Instead, commit to starting. Take a look at what you’ve spent in the last three months. See if there are areas you can begin budgeting tighter and use the excess to fund your retirement savings.
As illustrated above, you will have to save more in order to catch up on the years you missed. However, as you get older, you’ll hopefully be making more money and have more disposable income, making this slightly more manageable.
Another benefit as you get older, the IRS lets you save more in certain accounts. Take advantage of this by maxing out your contributions, following the smart money order.1 After maxing out employer-matches (essentially “free money”), begin maximizing your tax-free savings. For 2019-2021, individuals under 50 can invest up to $6,000 annually in an IRA, while individuals 50 and older can invest up to an additional $1,000 annually to catch up. It may be important to check with a tax professional if in a higher income tax bracket to ensure that you re still eligible for Roth contributions.
Through the SECURE act, there’s also now no maximum age for Roth IRA contributions.
Live within your means.
By budgeting and reducing your expenses, not only will you free up more money to invest in your retirement accounts, but you’ll also reduce the total you need to save for retirement. The lower you anticipate your expenses to be in retirement, the less you’ll need to save to sustain your lifestyle, and the slower you’ll depreciate your savings.
If you’re an empty nester who still lives in the same house from when you had kids at home, consider downsizing your house. After retiring, it may make sense to relocate to an area with a lower cost of living.
This isn’t the ideal choice, but if you’re still healthy and capable, working a few more years can help close the gap on an underfunded retirement. At the end of your career, your salary is likely to be at its peak. If feasible, working an additional 2-3 years delays having to pull from your savings and allows you to save even more.
If you don’t want to continue working full time, even working part-time can help supplement your income and ease your transition into a slower lifestyle. Health contingent, you may even find that you enjoy maintaining some structure and activity in your life.
Another benefit to working longer is you’ll increase your Social Security benefits. Working longer (paying into Social Security) and waiting longer to start making withdrawals will increase your Social Security benefits. Full retirement benefits kick-in at 70. Use the Social Security Administration benefit calculator to explore how waiting could alter your benefits.
Another important consideration is how life expectancy has changed over the last few years. In the last 50 years alone, life expectancy has increased significantly. While working longer may feel like you’re eating away at your retirement years, don’t forget you might be alive longer than generations before you.
Plan for your retirement.
Starting late might mean traveling the world with your spouse is no longer within the realm of retirement possibilities, but that doesn’t mean you can’t still plan a retirement that makes you happy and comfortable.
Envisioning your retired life and making a plan for how you’ll spend it can make it easier to set clear goals to work toward. When you’re making the decision between a brand new car and buying off the used lot, envisioning the retirement of your dreams can help you make future-oriented decisions.
Talk to an advisor.
Planning for retirement on your own can be scary and stressful — there’s so much to consider. Reach out to a financial advisor to discuss your retirement goals and get advice for reaching them.
We’re always here to help! We offer a personalized roadmap to determine how much you need to save, when and where to save, and when you can retire. Want to chat with our team? Schedule time on our calendar.
1The Smart Money Order is a concept derived from Patrick Kelly’s book Tax-Free Retirement.