One of the unfortunate facts of planning for retirement is that it takes money. The more the better.
We aren’t necessarily programmed as human beings to think very far into the future. Even less are we prone to give up a comfort today for a promised but uncertain comfort in the future.
Yet our logical brains know that the future is coming and that we need to prepare for it. That means money.
Worse, our earnings early in our working lives tend to be lower, so saving a large amount in absolute dollars is very hard. We thus push off the idea of saving into the future, when we feel we will have more flexibility.
That’s not what happens, of course. It’s very hard once you put on weight and need a larger pant size to roll back the clock. Likewise, once you get to a set level of spending, living on less is tough.
Thus it’s important, at whatever stage you find yourself, to be aggressive about saving and investing. The dollar amounts might be very different, but that’s okay. Ten percent of a relatively meager income can turn into a lot of money, so long as you start early.
Why is that? Compounding. The longer you save, the more time that money has to grow and turn into more money.
Money doubles every 10 years or so at a market rate of return. But it’s that second decade when things get interesting. If you have just $5,000 to set aside a year, it will become about $84,000 in a decade’s time.
Why not $50,000? Because each year you earn interest, dividends and capital appreciation — if you own a portfolio of reasonably invested asset types.
Over the next decade your money doubles from the new base position of $84,000. What’s more, you continue to save that $5,000 a year. You are in the vicinity now of $245,000.
Ten years more and it’s $573,000. At full four decades at you hit $1.2 million. Remember, you never increased your savings rate above $5,000, but you also never quit saving.
If you’re already well into your working career, you can make the same thing happen. But you now lack the time advantage, so it will take more money. If you have just 25 years to save, you’ll need to hit the 401(k) maximum of $17,500 to get to $1.3 million. A couple doubling up at $34,000 will get to just over $1 million within 15 years.
You could also simply shoot for a higher rate of return. But the chances are much higher of missing your target, since the more risk you take with your portfolio, the more likely it is that a market decline will set in at exactly the wrong moment.
It’s possible to retire well and on time, so long as you run the numbers and fully understand how aggressive you need to be — aggressive in terms of saving — in order to achieve your personal goal.