{"id":6054,"date":"2013-03-19T11:54:57","date_gmt":"2013-03-19T18:54:57","guid":{"rendered":"http:\/\/www.marketriders.com\/investing\/?p=6054"},"modified":"2016-12-21T07:30:42","modified_gmt":"2016-12-21T15:30:42","slug":"compound-interest-youre-doing-it-wrong","status":"publish","type":"post","link":"https:\/\/www.marketriders.com\/investing\/compound-interest-youre-doing-it-wrong\/","title":{"rendered":"Compound Interest: You’re Doing It Wrong"},"content":{"rendered":"

The latest data on our retirement readiness is out and it is, of course, very gloomy.<\/p>\n

I won’t drag you through\u00a0the entire report<\/a>\u00a0from the Employee Benefit Research Institute (EBRI), since you likely know the bottom line: 57% of working Americans have less than $25,000 in\u00a0non-pension,\u00a0non-real\u00a0estate savings and a shocking 28% have less than $1,000.<\/p>\n

Nevertheless, 40% of us believe that we will need $500,000 saved up to retire well. The remainder picked lower numbers.<\/p>\n

\"coins\"<\/a><\/p>\n

The figures suggest that the baby boomers are in for a seriously problematic retirement. They’ll be more dependent on their adult children, on government programs and continued employment in their old age to get by. This we know.<\/p>\n

The really troublesome part of the survey, however, is that younger people aren’t saving enough, either, at an age when saving is most effective.<\/p>\n

The\u00a0EBRI\u00a0study found that for workers ages 25 to 34 just 56% said they had saved money for retirement. Ten years ago, the number was a bit better.\u00a0Sixty-five\u00a0percent of young workers were saving then.<\/p>\n

It’s after age 35 that most workers\u00a0begin to take retirement seriously<\/a>. The numbers reporting that they save money shoots up to 77% and remains high until the mid-50s.<\/p>\n

That’s getting it exactly backwards.<\/p>\n

Yes, it’s hard to save money when\u00a0you’re\u00a0young and struggling. Jobs don’t pay enough, students often carry college debt and the cost of living in places that generate jobs, our larger cities, can be high.<\/p>\n

Nevertheless, it’s during those five to 10 years right after school that people should hit their savings strategy\u00a0head-on. The reason is compounding.<\/p>\n

Let’s assume a 25-year-old gets an\u00a0entry-level\u00a0job in a\u00a0mid-sized\u00a0bank as an accountant, making\u00a0the average national salary for beginning accountants<\/a>\u00a0of $44,965.<\/p>\n

There are a bunch\u00a0of tax withholding assumptions here, but for simplicity’s sake let’s say our young saver puts aside $5,000 a year for 20 years \u2014 then stops saving completely.<\/p>\n

At a market return of 7%, you can expect the roughly $100,000 set aside from her paycheck to more than double, reaching $218,500 by the time she reaches 45.<\/p>\n

From ages 45 to 65, our accountant’s retirement target, that money will compound twice more, that is, it will double and double again, ending up at $875,396.<\/p>\n

Remember, she stops saving completely at age 45. The money grows on its own over the second, 20-year period.<\/p>\n

Compare that outcome to the more likely scenario: Same accountant, same salary, but no savings at all until age 45. How much must the second accountant save annually to get the same outcome? Double, maybe?<\/p>\n

No, the second accountant must save four times as much money to hit the target by 65. She must scrimp and put away $20,000 a year to come up to $874,000 at retirement.<\/p>\n

Compound interest, the moral of the story<\/h2>\n

Here’s the rub: Those 45-year-olds, increasingly, have to foot the bills that come with caring for aging parents with little or no savings and, somehow, also finance their own kids’ lives and educations, on top of their own needs.<\/p>\n

If you are under 30 and reading this now, you know your mission: Save more, pronto. If\u00a0you’re\u00a0over 45 and find yourself staring at an empty bank account, that mission is not doubly urgent, but\u00a0quadruply\u00a0so.<\/p>\n

And if you haven’t\u00a0sat down and made a serious plan<\/a>\u00a0\u2014 and\u00a0EBRI\u00a0reports that 46% of workers have at least attempted to do so \u2014 now is the time.<\/p>\n","protected":false},"excerpt":{"rendered":"

The latest data on our retirement readiness is out and it is, of course, very gloomy. I won’t drag you through\u00a0the entire report\u00a0from the Employee Benefit Research Institute (EBRI), since … Read more →<\/span><\/a><\/p>\n","protected":false},"author":8,"featured_media":6092,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_wp_rev_ctl_limit":""},"categories":[8],"tags":[],"yoast_head":"\nCompound Interest: You're Doing It Wrong | MarketRiders.com<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.marketriders.com\/investing\/compound-interest-youre-doing-it-wrong\/\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:title\" content=\"Compound Interest: You're Doing It Wrong | MarketRiders.com\" \/>\n<meta name=\"twitter:description\" content=\"The latest data on our retirement readiness is out and it is, of course, very gloomy. 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