Saving for retirement is hard work. It involves sacrifice and dedication, a certain selflessness that few possess.
Unless it doesn’t. You can make saving for retirement quite easy, even painless. And that’s the mistake people make when they start to think about retirement: They make it hard for no reason at all.
The strongest ally you will ever have in terms of growing your savings into a real retirement is time. The longer and more consistently you save and invest, the more likely you are to achieve your goals.
Time literally is money. If you set aside $1 today, it can grow over your working years into $32 with necessarily taking on a lot of investment risk.
How? Compounding. Let’s say you start to work in your late teens and expect to work until your late 60s. The math works out to, let’s say, 50 years of lifetime earnings.
In the first 10 years, that $1 becomes $2. In the next decade it’s $4. The following decade it becomes $8. In the fourth decade it turns into $16. In the fifth and final 10 years, your $16 doubles to $32.
You haven’t added a cent to your savings. Imagine if you did, and imagine if you made it a small amount you might not miss, perhaps 10% of your salary. If you do it in an IRA or 401(k), it won’t even feel like 10% since you’ll likely get a tax break and, possibly, an employer match.
If you make $40,000 a year, we’re talking about $4,000. Your earnings ability never really increases but does keep pace with inflation. You get an employer match. Your work history starts at 18 and ends at 68.
Over those years you would have put in $464,723. Your employer adds in another $139,417. The compounding effect, however, puts the whole thing on steroids. Earning a market rate of return, your portfolio ends up at nearly $3.6 million.
Sounds crazy, but remember, just 10 years before your retirement year it’s not anywhere near $3.6 million. It’s just half that amount. A huge amount of the total gain happens in that last decade.
And that’s the mistake you cannot make. You cannot put off saving for retirement, however meager the amount. The lost time is the truly costly part, and you cannot “buy back” time in the market without taking on either extraordinary risk or saving much larger amounts.
Your action plan is this: Open an IRA or a 401(k) at work. If you have one, up your contribution.
And whatever you do, don’t stop putting money in, paycheck by paycheck. It doesn’t matter if the market is moving up, down or sideways, so long as you get that steady long-term return and avoid procrastination.