There’s a reason so many people find retirement financially stressful: A lot of people kick off their senior years with inadequate savings.
And it’s sort of hard to point a finger in that regard. After all, a lot of today’s near-retirees started their careers at a time when pensions were common in workplaces and the burden of saving for retirement didn’t fall on individuals the way it does today.
Still, it’s clear that many older Americans regret not starting to save for retirement earlier in life. And in a recent Nationwide survey, 63% said the top advice they’d give their younger selves is to start socking money away for retirement sooner rather than later.
The importance of starting young
When you’re young, you may not be so inclined to focus on funding an IRA or 401(k) plan. After all, at that stage of life, you may be more fixated on paying off student loans and starting to save for near-term goals, like buying a home.
That’s totally understandable. But if you don’t fund a nest egg from a young age, you could miss out on years of investment gains. And that could make a huge difference in the context of your retirement.
Let’s imagine you stick to a monthly retirement plan contribution of $400 throughout your career. Let’s also assume that your portfolio generates an average annual 8% return, which is a bit below the stock market’s average. Finally, let’s assume you retire at the age of 67, which is full retirement age for Social Security purposes if you were born in 1960 or after.
If you begin funding your nest egg at age 32, you’ll end up with $827,000. And that’s certainly a nice amount of money — more than what many seniors today have available to them.
But watch what happens if you start funding your nest egg at age 27 instead. Extending your investment window by five years puts you in a position to retire with over $1.24 million instead of $827,000.
Furthermore, in this example, let’s say you’re able to start contributing toward retirement at age 22 — as soon as you enter the labor force. In that scenario, you’re looking at a portfolio balance of over $1.85 million. That’s over $1 million more than your ending balance in our first example, where you started saving at age 32.
Start with small contributions and work your way up over time
It’s understandable that you may not be able to go all-in on retirement plan contributions the moment you begin working on a full-time basis. But it’s also perfectly OK to start with small contributions to a retirement plan and work your way up as your income grows.
If that means contributing just $50 a month to an IRA or 401(k) to begin with, so be it. Any dollar you invest as soon as possible gets more time to grow. And at the end of the day, starting early could really do a world of good for your retirement.