This is a guest post from Pauline from InvestmentZen.
Retirement, if you are in your 20s or 30s, can seem pretty far away. Three or four decades, longer than you have even been alive. Yet, if you want to make sure you have a comfortable retirement, and are financially independent in old age, you need to start thinking about it today.
If you look at the average amount people have in their 401k, if is pretty appalling. The average American only has around $100,000 in their 401k. Considering the safe withdrawal rate of 4%, so your money doesn’t run out while you are still alive, that means you would only have $4,000 per year to live on in retirement. I really hope you never have a medical emergency and your house is paid for! While $100,000 might sound like a lot to save, you need much, much more, to prepare for a decent retirement.
Using 4% as your nest egg withdrawal rate, you need 25x your yearly expenses in order to retire. For example, say you are currently living on $40,000 a year. You need to save $1,000,000 to retire. And yet, you could still argue that while some expenses decrease in retirement (such as housing if your house is paid for), you might need a lot more to cover healthcare and terminal care.
With an average market return rate of 8%, the numbers are as follow:
- If you save $1,000 a month, you will have one million in 26 years
- If you save $500 a month, you will have one million in 34 years
- If you save $250 a month, you will have one million in 42 years.
The $250 option is feasible if you are 18 and have a first job already, so you can retire when you are 60. But what these calculations show us, is that the longer you wait, the more you will have to save for retirement. Which is unfortunate, because if you are in your 30s or 40s already, you probably have a family to take care of, a house to pay down, colleges to save for, and a lot more expenses than when you were young. Finding $1,000 to save each month gets more complicated than finding $500 had you started 8 years earlier.
Everything is not lost though. The best time to start saving is now. And if you get started early, with compound interest on your side, financial independence might be just a few years away.
So how do you even start saving that much money? well, by doing just that, getting started. The longer you wait, the more disastrous the effect on your nest egg.
- Pick a low cost broker or robo-advisor and invest in index funds, then forget about it until retirement.
- Try to max it out every year, since the amount invested is tax free, giving you an instant return on investment.
- Take advantage of your employer match for free money!
- Be great at your job so you get a promotion every year. If your work is not rewarded, change companies. Try to save your raise for a year and keep living on last year’s income. That will boost your savings.
- Every year, review your expenses for waste and things you don’t need.
- Negotiate your bills, refinance your mortgage, and always look for value in things you need.
Your nest egg won’t build itself in a day, it takes patience and dedication. The earlier you start, the better you will be in retirement.