When Should You Start Saving for Retirement?

There's no one-size-fits-all answer, but here's a guide to figure out your own goals and savings needs.

Matthew Frankel, CFP
Matthew Frankel, CFP
May 1, 2016 at 6:38AM
Investment Planning

Image source: www.aag.com via Flickr.

There's no one good answer to the question of when you should start saving for retirement. Obviously, starting to save at a young age -- in your early 20s -- would be great, as it would give your investments 40 years or more of compounding before you reach 65, a common retirement age. However, this may not be practical for many readers who may already be past their 20s, or may still be in school at that point in their lives.

The good news is that by saving wisely in tax-deferred retirement accounts, it's never too late to have a big impact. Here's a guide to help you figure out where to start, and what you'll need to save.

How much do you need to retire comfortably?
Your ideal retirement nest egg depends on a few things. Most obviously, it depends on how much you plan to spend in retirement. Experts generally suggest that you should plan to need 80% of your pre-retirement income, but this can vary significantly.

If you are a saver by nature, and plan on living simply in retirement, your need could be 50% to 60%. On the other hand, if you plan to travel often, spoil your grandkids, and pursue expensive hobbies, you could need 100% of your pre-retirement income or more. For simplicity's sake, we'll use the 80% rule in our calculations. If you're fairly certain that your income needs will be higher or lower, adjust the multiplier accordingly when making your own calculations.

Next, you'll need to determine how much of this income will need to come from savings by subtracting out other sources such as Social Security and any pension income you may be entitled to. You can get a good estimate of your projected Social Security benefit at www.ssa.gov by creating an account and viewing your Social Security statements.

The popular "4% rule" of retirement says that you can reasonably expect to withdraw 4% of your retirement savings during the first year, and give yourself cost-of-living increases in subsequent years, with little chance of your money running out in your lifetime. So, based on the income need you calculated in the previous step, use this formula to figure out your required nest egg.

For example, if I calculate that I'll need $60,000 per year in retirement, and I can expect $22,000 from Social Security, the difference of $38,000 will need to come from my savings. Dividing by 0.04 would indicate that I will need to save $950,000 to retire comfortably.

The earlier you start, the less you'll have to save each month
Now, when crunching the numbers, you may find that it's possible (at least in theory) to build the retirement nest egg you need in a short period of time -- say, 10 years or so. However, that doesn't make it a good idea.

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First of all, if you wait until 10 years before you want to retire to start, you're not giving yourself much room for error should things go wrong. What if you lose your job and it takes a while to find a new one? Or, what if you get hit with a major unexpected expense, such as a big medical bill for a sudden health emergency? These things happen, and they are a lot easier to overcome financially when they represent a small fraction of your retirement savings time.

Second, it'll simply be much easier to meet your goals if you start earlier. To illustrate just how important this is, let's say that you determine you'll need a $1 million nest egg to retire comfortably at age 65. Here's how much you'll need to save per month, based on a historically conservative 7% annual return.

If you start at age...

You'll need to save about this much per month...















To see how these numbers could translate to a savings goal other than $1 million, use this formula to figure out how much you should be saving monthly:

For example, if you determine you need $1.3 million and plan to start saving at 30, you can determine your monthly savings goal as follows:

Which retirement account is best for you
There are two main types of retirement accounts: 401(k) and other employer-sponsored plans and IRAs.

If you participate in a 401(k) or similar plan at work, you have the ability to defer $18,000 of your compensation in 2016, or $24,000 if you're aged 50 or above. Most people contribute enough to get the full employer match, but you shouldn't necessarily stop there. While it's not necessary (or practical) for most people to contribute the maximum, you may be surprised at how much of a difference an extra percent or two of your salary can make.

If you don't have a retirement plan at work, or you've maxed out your employer match and want more control over your investments, consider an IRA. These are tax-advantaged accounts that allow individuals to save up to $5,500 in 2016 ($6,500 if over 50), and unlike a 401(k) you can invest in any stocks, bonds, or funds you'd like. IRAs come in two main varieties -- traditional or Roth, and there are a few other options if you're self-employed. Here's a discussion of the different types of IRAs to help you determine the best choice for you.

The short answer
So, when should you start saving for retirement? As soon as possible. While it's certainly possible to build a retirement nest egg in a relatively short period of time, the longer you wait, the tougher it's going to be. Take advantage of the tax benefits of retirement accounts, invest wisely, and set aside money out of every paycheck, and you may be surprised at how quickly it can add up.