Don’t sell your savings short and limit what you can do in retirement as a result.
In the course of saving for retirement, a number of things could, unfortunately, go wrong. Investing too conservatively, for example, could leave you short on funds for your senior years. That is why it’s generally a good idea to load your retirement plan with stocks — either individual companies, if you’re comfortable choosing them, or S&P 500 index funds.
You might also choose the wrong account in which to save for retirement and forgo tax savings in the process. Traditional IRAs and 401(k) plans give you tax-free contributions and tax-deferred gains. Roth IRAs and 401(k)s give you tax-free gains and withdrawals.
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But perhaps the biggest mistake you could make in the course of building your retirement nest egg is to wait too long to start making contributions. In fact, putting off those contributions by even a relatively short amount of time could cost you over $500,000.
When you limit your savings window
Let’s say you’re able to save $300 a month in a retirement account starting at age 35, and you end up retiring at 65. That gives you a 30-year window to accumulate wealth for your senior years.
If your investments in your retirement plan deliver an 8% average annual return, which is a notch below the stock market’s average, you’re looking at a balance of about $408,000. That’s double the median retirement savings balance among 65- to 74-year-olds, according to the Federal Reserve’s most recent Survey of Consumer Finances.
However, watch what happens when you start saving that $300 a month at age 25 instead of 35, thereby extending your savings window to 40 years. In that case, assuming that same 8% return, you’re looking at a balance of close to $933,000.
That’s more than 4.5 times the median retirement savings balance at age 65. And it’s also a $525,000 difference compared to limiting your savings window to 30 years.
You’ll notice, too, that by saving $300 a month, you’re getting an extra $525,000 at a cost of just $36,000 in out-of-pocket contributions. That’s a pretty worthwhile trade-off.
Try to start saving for retirement as early in life as you can
It’s not necessarily easy to begin contributing to an IRA or 401(k) in your 20s. At that stage of life, you may be grappling with various debts, from credit card balances to student loans. And you may be doing that on an entry-level paycheck, too.
But remember, the example above doesn’t have you saving $900 a month for retirement. Rather, you’re giving up $300 of your monthly paycheck. It’s not a totally unreasonable sum if you budget your money well and are willing to make some sacrifices.
In fact, if you find yourself unmotivated to start saving for retirement in your 20s and are looking to give yourself a 10-year reprieve, ask yourself what an extra $500,000 or more could do for your senior years. That might give you the push you need to prioritize your IRA or 401(k) earlier in life and reap the rewards later.