Why an early start to retirement savings is critical
I get a lot of emails from people in their forties and fifties who are suddenly panicking about their retirement savings. Often, they don’t have any or they have very little, yet they still want to retire at age 65.
At the same time, I also get emails from people in their twenties who are already saving diligently for retirement. What they want to know is how much they actually need to save so that they, too, can retire at age 65.
The people in the first group obviously spent a big chunk of their adult life not having to save for retirement. This gave them more flexibility with their money in their twenties and thirties than people who were already saving for retirement.
On the other hand, people who start saving early don’t have to save as much overall as people who start later on.
So, which approach is better? Let’s look at the two cases.
Let’s say you’re 20 years old right now. You want to have $2 million set aside for retirement at age 65 and, magically, there’s an index fund out there that will return 7% a year (I’m using this index fund as a convenience, basing the 7% on what Warren Buffett suggests is a good number to use for average stock market returns going forward).
If you start investing at age 20, you’ll need to put aside about $510 a month to reach this goal.
If you start at age 25, you’ll need to set aside about $725 a month to reach this goal, but you don’t have to save anything from ages 20 to 25.
If you start at age 30, you’ll need to set aside about $1,050 a month to reach this goal, but you don’t have to save anything from ages 20 to 30.
If you start at age 35, you’ll need to set aside about $1,530 a month to reach this goal, but you don’t have to save anything from ages 20 to 35.
If you start at age 40, you’ll need to set aside about $2,270 a month to reach this goal, but you don’t have to save anything from ages 20 to 40.
If you start at age 45, you’ll need to set aside about $3,480 a month to reach this goal, but you don’t have to save anything from ages 20 to 45.
If you start at age 50, you’ll need to set aside about $5,600 a month to reach this goal, but you don’t have to save anything from ages 20 to 50.
As you read through those previous sentences, you probably thought that the amounts early on were quite manageable, but when you got to age 50, you’re likely thinking that it’s bordering on impossible.
That’s the lesson here. You can forego the early retirement savings, but catching up later on can be incredibly punishing and the longer you wait, the more punishing it gets.
Thus, my advice is to start saving for retirement right now, no matter what age you are. Even if you can’t save very much, start by saving something. If you’re not saving, you need to be doing something else that’s financially urgent with your money.
For example, if you just save $100 per month starting at age 20 in the above retirement account, increase it to $200 a month at age 30, $300 a month at age 40, $400 a month at age 50, and $500 a month at age 60, you’ll have $720,000 saved for retirement. Double each of those numbers and you’re getting close to where you need to be.
Start saving now, even if it’s just a little bit. Don’t burden your future self with crippling amounts of retirement savings or employment until the very end of your life.
