If someone came up to you and asked you to give them $ 600 today, and in exchange, they would give you $ 8,400 later, you probably won't say no. But people give up opportunities like this all the time. They just don't get it.
Retirement can seem a long way off, and if you still have decades left in the workforce, it may not seem as urgent as buying the things you want on the list today. But waiting for another year to start saving for retirement can make your job a lot more difficult.
Don't you believe me? Let's look at the evidence.
The real cost of waiting a year to start saving for retirement
The value of retirement accounts depends on a few factors: how much you contribute, your investment rate and how long the money has been in your account. The more you contribute, the better your investment, and the faster you start saving, the more you will 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 are planning to retire at 65. Each contributes $ 50 per month to their retirement account, earning a 7% annual return. At 65, the person who started saving $ 26,000 would have around $ 1[ads1]11,000, while the person who started saving at 25 would have almost $ 120,000. That's a difference of nearly $ 9,000.
Double the contribution rate, and double the difference between the two pension amounts. Keeping all other factors the same, a $ 100 per month contribution would net the person who started saving 25 around $ 240,000, while the person waiting for 26 would only have around $ 223,000 – almost $ 17,000 less .
If you hope to retire comfortably, you need to set aside more than $ 100 a month, so let's try a more practical scenario. The median salary in the United States is $ 47,060, according to the latest data from the Bureau of Labor Statistics. If you try to save 15% of your retirement income, it amounts to about $ 7,059 per year, or about $ 588 per month. Using the same return and savings age 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 started saving at 26 would only have $ 1310,000.
The difference in the above examples is so extreme because of how long the savings money must compound – 39 and 40 years. If you only have 20 years left until you become a pensioner, delaying one year may not hurt your final balance as much because the extra savings money had less years left than previous examples. But it will still have an impact on your final balance, and you'll have to spend more money each month if you want to withdraw a comfortable amount.
How to start saving for retirement now
The first step is to open a retirement account if you do not already have one. Your employer may offer a 401 (k). Start here, especially if your business matches some of your contributions. You can contribute up to $ 19,000 to a 401 (k) in 2019 or $ 25,000 if you are 50 years or older.
If your employer does not have a 401 (k) or you are not qualified, open an IRA instead. The contribution limits are lower. You can only contribute up to $ 6,000 to an IRA in 2019 or $ 7,000 if you are 50 years or older.
Use a retirement calculator to estimate how much you need to cover retirement expenses and how much you need to save each month to reach your goal. Try to save at least as much, if you can. If not, you can contribute as much as you can now. As our first example showed, even $ 50 a month can add hundreds of thousands of dollars over time.
Look for opportunities to increase your savings. Try to reduce how much you spend on discretionary purchases each month, or find ways to increase your money. This may involve starting a side business or working overtime on your existing job. You may also consider inserting your tax refund or your annual bonus into an IRA. If you get an increase, you must raise your pension contributions before you do anything else.
You may not feel that you can afford to contribute much to a pension today, but every penny you put aside and every day the money in your retirement account matters. Take advantage of the time left to put yourself on track for your best retirement life.