Time is arguably your most precious resource. It can single-handedly change your financial future, but you must take advantage of it.
Most people don't, which is the most devastating and avoidable retirement mistake anyone could make. Just a little money invested in your early years can grow to life-changing returns by the time you're ready to retire.
Most people procrastinate on retirement planning
Retirement is the last thing on most young people's minds. Whether it's dating, a career, or kids, there is always something to worry about today that distracts them from that distant time in the future called retirement.
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Vanguard put out its 2022 version of its report How America Saves, illustrating the savings habits of consumers across the country. The median retirement-account balance by age group is:
| Age | Balance |
|---|---|
| Below 25 | $1,786 |
| 25-34 | $14,068 |
| 35-44 | $36,117 |
| 45-54 | $61,530 |
| 55-64 | $89,716 |
| 65+ | $87,725 |
Data source: Vanguard.
The median balance at age 65 means that people typically accumulate an average of just $2,193 in wealth annually over 40 years. Most of them put their retirement savings into passive funds, meaning the actual savings rate is even lower than it looks when you subtract investment returns. So people are barely building any wealth to begin with.
Why you shouldn't be one of them
If you use a traditional withdrawal method like the 4% rule, based on the Vanguard figures above, you're only getting $3,509 your first year from your savings at age 65! That's $292 per month; the average monthly Social Security benefit for retired workers is $1,670.95, for a total of $1,962.95 per month to live off. Put another way, it's the equivalent of working a 40-hour week for $11.32 per hour. How many people do you know who are living comfortably with a job paying $11.32 per hour? I don't know any.
The harsh reality of this math underlines the retirement crisis facing America: People aren't saving as aggressively for retirement as they should be. Perhaps the most regrettable part of this is that it's avoidable by starting early enough.
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If people would invest $100 per month from when they turned 20 to when they turned 65, a passive fund returning an average of 9% annually would generate a nest egg worth $852,803. Apply the same 4% rule, and you're getting $34,112 a year, putting you within shouting distance of the average household income in the U.S. when you factor in Social Security. It's OK if you're older than 20; the point is that the sooner you start, the better off you'll be.
Building wealth on autopilot
Investing doesn't have to be complicated; you can build wealth in a way that's out of sight and out of mind. You can set up automated investing directly through your 401(k) or other employer-sponsored plan, as well as in individual accounts with your brokerage.
Passive investments like index funds or exchange-traded funds (ETFs) can track the broader market, like the SPDR S&P 500 Trust ETF, which mimics the performance of the S&P 500, with its average annual return of about 10% historically. In all, investors can easily find funds that match up with their individual goals and risk tolerance.
A couple of hours to set up these accounts is all it takes to put wealth-building on autopilot; a little contribution can go a long way with time and regularity. Whether entering the workforce or eying retirement sooner rather than later, you always have time to start saving your money.
