Saving for Retirement The Time Value of Money

Aside from simply starting to saving for retirement, nothing will help you more than time.  Unfortunately, it is something we cannot get more of, so starting early is about the single smartest saving strategy you can employ.  Allow me to illustrate how starting early can help with an excerpt from my next book about Retirement.
We will say that Eli The Early Bird will make 15 annual deposits of $3,000.00 (equivalent of $250.00 per month), starting at age 25, she will earn 7 percent per year on her investment, BUT she will never add another penny after year 15, stopping at age 40.  Pete The Procrastinator will wait 10-years before he begins, thus starting at age 35, making the exact same annual contributions BUT he will make those deposits for 25-years, not 15 like Eli did, and he will earn the same 7 percent and after his 25th contribution at age 60, he too will not contribute another penny.  Here is the summary again:

The Cost of Waiting
Eli The Early Bird vs Pete The Procrastinator

You see right away how much more Pete The Procrastinator had to contribute, nearly double plus an extra 10-years and until age 60 whereas Eli The Early Bird stopped contributing at age 40. Here are the final results:

What a clear-cut example of how procrastinating, how waiting, does you no favors.  If you were wondering (of course I was) how much each month Pete The Procrastinator would have to save those last 5-years before retirement to catch up, to reach about the same balance as Eli The Early Bird, it is $2,430.00!  So, to arrive at the same balances, Pete The Procrastinator would need to power save $29,160 each of the last five years (age 60 to 65) or a total of an extra $145,800.00 out of his pocket to match what Eli The Early Bird has in her nest egg; wow!

I have plenty more examples in my book.  Okay Dave, what if I started late, is it too late for me?  In almost all cases, no, it is not late, but you can bet it is much more difficult.  One small gift our Government does provide is what is called Catch-up Contributions.  When you are saving via a 401K, a Roth, a Traditional IRA, or a Health Savings Account (HSA), once you reach age 50, you can save more, usually $1K per year more.  That can certainly help.  Eliminating all debt, including your mortgage, can free up a lot of money.  Once your kids, if you have any, are through college and have moved out can also free up money.  Hopefully at this point in your work career you are at peak earning.  Having a higher salary will help you save more and get back on track.  Getting a second job can be another way to “super save” during this time as well.

It is never too late, but you must recognize the need and take action, create a plan, set a goal, and do not become distracted.  Having enough money in retirement is too important to not take it seriously, to not give it your undivided attention!  Start a conversation, what questions do you have for me?