While some financial advisors might tell you that it’s never too late to begin saving for your “golden years”, the simple fact is that putting it off for too many years can seriously reduce the amount of money you’ll have in your retirement nest egg once retirement actually arrives.
The average person will need approximately 70% of the income they’re making before retirement in order to keep up their standard of living once they put the working world aside for good. In order to make this happen it’s best to start as early as possible. Not only will this allow you to take advantage of compound interest but also will reduce the amount of money that you need to put aside later in order to reach your specific monetary retirement goal.
Below are two examples that clearly show how starting early to save for retirement is a sound and intelligent financial choice.
Example # 1: George and Mia are 21, college graduates and start the same new job at the same pay. George decides that he’s going to save $100.00 per month of his pay but Mia figures that putting off retirement savings while she has some fun is no big deal. She decides to start saving the same $100.00 per month but 10 years later, when she turns 31.
Assuming that both of them have approximately the same expenses, and receive an annual return of 6%, George will have approximately $253,000 in his retirement savings account by the time he reaches the age of 65 while Mia will only have $132,000, a difference of $123,000 just because she started saving 10 years later than George.
Of course there are other factors that come into play when planning for retirement including inflation, changes in income tax rates and also changes in lifestyle needs. A good financial planner will be able to help you figure out how much you need to save in order to maintain your pre-retirement standards but keep in mind that those will probably change. In fact, they may change several times during your working life. That being said, having a good idea of what you’re going to need (and want) for your retirement years will make it quite a bit easier to determine if what you’re saving now is going to be enough.
Example #2: Robert decides that he wants to retire by the time he’s 50 and, with the help of his financial planner, they determine together that he’ll need at least $1 million by that time in order to have enough to last for the rest of his life. He’s 25 years old and has $5000 in savings. Assuming a 6% return, he’ll need to save $1400 a month in order to reach his $1 million goal by the time he turns 50.
If Robert decides to wait until he’s 30 to start saving, he’ll need to put aside $2100 every month, or $700 more each month, just because of the difference the delay of five years will cause. That’s approximately 50% more per month than he will have to save then if he starts at the age of 25.
For those people who simply can’t save enough to meet their goal because they started too late, the best thing to do is put as much aside as possible every single month, saving whatever you can afford and cutting back as much as possible on expenses.
The Lesson to be Learned
The two examples that we used above should already have convinced you that starting your retirement planning, and savings, as early as possible is a prudent idea. Meeting your goals means exploring any and all options that are available and, once you’ve determined which ones are right for you, starting right away. Working with a financial planner is obviously a good idea as well as making them aware of all of the expenses that you currently have so that your plans will be as realistic as possible. Simply put, the earlier you start saving for retirement, the easier it will be to put enough aside to enjoy your golden years in the fashion that you’d like.