Many people make one key mistake in the course of planning for retirement. Actually, it's sort of a dual mistake. They underestimate their expenses and overestimate their Social Security benefits.
The average senior on Social Security today collects $1,663 a month. Combined with additional income sources, that could make for a decent income. But on their own, Social Security benefits may not go very far, especially when we take into account the various costs seniors tend to face.
It's a big myth that living costs drop exponentially during retirement. Sure, they might shrink by a good 20% to 30%, especially if your mortgage is paid off and you're no longer having to carve out money to contribute to your IRA or 401(k) plan.
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But for the most part, you'll need a decent amount of income to live comfortably once you stop working. And the longer a savings window you give yourself, the more financial freedom you're apt to enjoy later in life.
Use time to your advantage
You may not manage to sock away $20,000 a year for retirement. But if you save a smaller amount of money consistently and invest your savings wisely, you could end up with a sizable nest egg to enjoy.
Let's imagine you're able to contribute $500 a month to an IRA or 401(k). Let's also assume you invest your savings heavily in stocks and therefore manage to generate an average annual 8% return on your money (that 8% is a few percentage points below the stock market's average).
Here's the amount of savings you might amass, depending on how long your savings window is:
|
Save $500 a Month for This Many Years: |
You'll End Up With: |
|---|---|
|
20 years |
$275,000 |
|
25 years |
$439,000 |
|
30 years |
$680,000 |
|
35 years |
$1.03 million |
|
40 years |
$1.56 million |
|
45 years |
$2.3 million |
Table and calculations by author.
As you can see, the more time you give your money to grow, the more favorable the results. If you've yet to begin saving for the future, take some time to work up a budget that allows you to carve out money for savings.
To be clear, building a nest egg may require some degree of sacrifice. It could mean having to take low-key vacations every year instead of fancier ones. Or, it could mean driving a boring old car instead of a luxury vehicle with all the bells and whistles.
But remember, many seniors are caught off guard by how expensive retirement is, and that's not a boat you want to land in. While there are some steps you can take to eke more money out of Social Security, like delaying your filing as long as possible, you may run into some snags there, like having to retire sooner than planned.
If you want to set yourself up for a secure retirement, commit to saving for it and give your money as much time to grow as possible. Investing over a lengthy period of time could turn a modest amount of retirement savings into more money than you may have ever imagined having.
