Retirement Savings? Start Small.

“Money makes money. And the money that money makes, makes money.” -Ben Franklin

Retirement is one aspect of life most of us will participate in, either by choice or because poor health forces us there, so why do so many people delay saving for retirement? The earlier you save, even if it’s a small amount, the more time compound interest can work in your favor to grow your retirement savings. I recently spoke to a high school class of graduating seniors about how to be successful in their careers and ended my speech with an example of how investing $100 consistently each month throughout their 40-year careers could make them millionaires compared to the $230,000 they would save if they began at age 50 and invested $1,000 a month for 10 years with the same annual return. Perhaps my words of wisdom were lost on 18-year olds just starting out in life but the example is a useful one for demonstrating the power of compound interest to people of all ages and will hopefully spur some to start saving today, even if it’s a small amount.

The rule of thumb is you should shoot for replacing 80% of your annual working income in retirement, so for someone making $100,000 a year today, that would be $80,000. Another rule is that you should only draw 4% of your savings in order to have decent chance at making it last through an average retirement. Under these guidelines, someone would need $2 million saved in order to draw $80,000 per year safely. These are general guidelines and I encourage the use of a professional retirement planner for your individual circumstance, but this example demonstrates what a large and important task saving for retirement actually is and surprises many who haven’t made it a priority.

Another example is that money invested at age 25 triples by age 45 based on average U.S. stock market returns. U.S. employers and financial service firms have done a great job making it easier for people to save and invest for retirement with many employers matching up to 100% of employee contributions up to a maximum amount. If at all possible, you should be saving the minimum amount to receive the match from your employer because if not, you’re passing up on free money that will grow into more money over time.

Another great tool most employer 401k plans offer is the ability to automatically increase your contributions on a scheduled basis. This makes it easy for people who want to get to a point where they’re saving 15% of their income but can’t get there all at once. By increasing the savings rate 1% annually for example, it reduces the anxiety and allows people to adjust to saving more over a long period of time.

Saving for retirement is important and the earlier you start the better off you’ll be, but if you’re behind train yourself to be intentional about it. There are so many free resources available to learn more about retirement saving that anyone can learn enough to understand the basics on their own. Start Small and build up with the help of a professional retirement planner. Just like a personal trainer will hold you accountable for behavior that benefits you, so will a good financial planner. Starting is the hardest part, so start today and encourage those you care about to do the same!


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