You probably know that you should be saving for retirement. But when it’s so far away, and you have more immediate concerns to worry about, it’s hard to give up a sizable chunk of your earnings for a benefit you won’t realize for decades. After all, you’ll have plenty of time to save for retirement in the future, right?
Maybe. But what most people don’t realize is that every day you put off saving for retirement, you might be increasing the amount of money you will need to set aside from each paycheck in the future. Waiting a few years or a decade to begin saving could be a $100,000 mistake.
Don’t believe me? Take a look at the evidence…
Why you need to start saving for retirement right now
If you had to keep all of your retirement savings in cash, most people would probably never retire because inflation would erode the value of those savings over time. That’s why you invest your retirement funds in assets like stocks and bonds, in order to help them beat the inflation rate and grow over time. Money you contribute when you’re younger matters more because it has more time to grow before you need to begin drawing upon your savings.
To understand what kind of effect this can have, let’s consider a few different scenarios. For each scenario in the table below, we’ll assume that the person earns a 7% annual rate of return on their investments and plans to retire at 65. Here’s how much they would have by the time they retired based on when they began saving and how much they set aside per month for retirement.
Retirement account balances at 65 based on starting age and monthly savings amount
| Starting at Age 25 | Starting at Age 35 | Starting at Age 45 | Starting at Age 55 | |
|---|---|---|---|---|
| Saving $100/month | $239,562 | $119,353 | $49,195 | $16,580 |
| Saving $250/month | $598,905 | $283,382 | $122,986 | $41,449 |
| Saving $500/month | $1,197,811 | $566,765 | $245,973 | $82,899 |
| Saving $1,000/month | $2,395,621 | $1,133,529 | $491,946 | $165,797 |
SOURCE: U.S. SECURITIES AND EXCHANGE COMMISSION COMPOUND INTEREST CALCULATOR. ALL FIGURES ARE ROUNDED TO THE NEAREST DOLLAR.
The table clearly illustrates that the earlier you begin saving, the more your savings will be worth in the end. Some of the above differences come from additional personal contributions. The person who begins saving $100 per month at 25 will end up putting $12,000 more of their own money toward retirement than the person who began saving $100 per month at 35, but they will end up with over $120,000 more in the end. And this difference could be even greater if you set aside more money per month or get a larger rate of return on your investments.
If the person who began saving at 35 wanted to retire with the same amount of money as the person who began saving $100 per month at 25, they would have to save about $211 per month, assuming that the market conditions are roughly the same in both cases. Over 30 years, that adds up to $75,960 in personal retirement contributions. But the person who saved $100 per month over 40 years would only have to set aside $48,000 of their own money for their future. That’s a difference of nearly $28,000…
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