You’ve always heard that you should start saving for retirement as early as possible. But this advice is easy to ignore when you’re in your 20s. You might ignore it even if you’re in your 30s. After all, retirement seems a long way away.
But the longer you wait to start saving, the more difficult it is to stash away enough money to afford a comfortable retirement. And those after-work years won’t be much fun when you’re struggling to pay the bills each month.
Ilene Davis, a certified financial planner in Cocoa, Fla., sums it up this way: There are three factors that determine if you’ll have enough income to support the lifestyle you want during your retirement years. First, there’s the amount of money that you save each year. Then there’s the rate of return that this money earns each year. Finally, there’s time.
It’s this last factor that you can most easily control.
“The longer one waits to start saving, the higher the rate of return or the more investment you’ll need each year to reach a particular goal,” Davis said.
And if you wait too long to save? You might run out of time to put enough money in your retirement accounts.
The Shocking Numbers
What will your retirement look like if you put off saving for it? It could be one where you spend every day worrying if you’ll have enough to pay your bills and put food on the table.
Timothy Wiedman, retired associate professor of management and human resources at Doane University in Crete, Neb., and the former teacher of a retirement course, says that raw numbers can show just how much of a struggle retirement can be when you don’t plan for it.
Consider a 23-year-old recent college graduate. If that graduate puts $2,500 each year into a Roth IRA that earns a 6.8% average annual return, the graduate will have $627,844 in 43 years when he or she reaches 67.
But if that same 23-year-old procrastinates? The end result will be quite different, Wiedman says. Say the investor waits until hitting 45 to start that same IRA that also earns an annual rate of return of 6.8 percent. In 22 years, when that investor turns 67, he or she will have just $239,099 saved for retirement. That’s a difference of almost $389,000.
That $239,099 might seem like a solid sum. But money disappears fast during retirement, especially if you want to take vacations, travel to see your grandchildren or devote time to sometimes costly hobbies. People live longer today, too, meaning that their retirement years last longer.
If you put off saving, then you might have to scale back your retirement plans. Instead of taking that long-awaited cruise around the world, you might have to be content with the occasional weekend at the lake.
Saving early can mean “the difference between having a comfortable retirement and struggling to afford anything beyond the basics,” Wiedman says.
Ed Snyder with Oaktree Financial Advisors in Carmel, Ind., said that those retirees who put off saving often end up back in the workforce. They might take jobs at their local grocery store, for instance, to earn the extra dollars they need each week to pay their bills.
Those who delay saving for retirement often find that the bad financial habits follow them into their after-work years, Snyder said. This can be especially problematic for retirees trying to live on a fixed income. After all, the income available to these retirees is finite. Those who’ve been unable to save a lot are more likely to burn through their retirement dollars.
“If you put off saving, it may mean that you lack the discipline to delay gratification,” Snyder says. “That can be problematic in retirement in that you risk spending your retirement savings too quickly.”
And if you do that? Not only will you be unable to afford all those trips or even that membership to a private golf club, you can also scratch eating out and buying new clothes off your list. You’ll struggle instead to make sure that you can cover your daily living expenses.
That’s no way to spend retirement.
David Bakke, an Atlanta-area writer and author of the personal-finance book “Don’t Be a Mule,” said that in the worst-case scenario, retirees who didn’t save might have to ask their children for money, a situation that no adult wants to face. Others may decide to take out a reverse mortgage on their homes to generate cash. Such a mortgage can help with that, but as Bakke says, it could also leave retirees with less money to leave to their children after they pass away. This could be distressing to those whose goals include leaving money to children and grandchildren.
“Retirement should be a time when you haven’t a financial care in the world, and with the right planning, that can certainly be a reality,” Bakke said. “But waiting to save for it is one of the worst financial mistakes you can make. It can easily turn those later years into stress-filled times.”
The Better Move
A smarter financial move? Start saving for retirement as soon as you can. If your company offers a 401(k) plan, this can be relatively easy. Just sign up for it, and your employer will place money in this retirement vehicle every time you get paid. With compounding, you’ll be surprised at how quickly these contributions grow.
If your employer doesn’t offer such a plan, open an IRA – traditional or Roth – and save as much money as you can every year. Even if you can only save what you consider a small amount, do it. The more saved early in your working career, the better off you’ll be when retirement comes.
Douglas Oliver, a certified financial planner with Capital Asset Management in Oklahoma City, said that waiting until you’re in your 40s or 50s to start saving almost guarantees a stressful retirement.
“For the average person, it is impossible to save your way to a comfortable retirement if you wait too long,” Oliver says. “By allowing your money to work for you 30 or 40 years, you greatly increase the likelihood of having adequate money at retirement.”
For more information on what you could be doing with your money in preparation for retirement, check out Zing’s series featuring retirement tips by decade:
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