We all have different reasons for putting off retirement savings during our careers. In our 20s, our income tends to get monopolized by student loans. In our 30s, we're buying homes and grappling with the cost of having kids. And in our 40s and 50s, we're paying for college and shelling out a small fortune to maintain the homes we bought years ago that are starting to show their age.
All of this might explain why nearly half of Americans 55 and older have no retirement savings to speak of. And while that might be a byproduct of missed opportunity for some, for others, it may be intentional. In fact, some workers purposely delay retirement savings with the intent to catch up later in life. But if that's your plan for retirement, you may want to rethink it, because the chance to play catch-up in your late 50s or 60s may not actually be there for you in the end.
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Your career might end before you expect it to
There's a reason catch-up contributions in IRAs and 401(k)s exist -- to allow older workers to make up for lost time and missed opportunities earlier in life. The problem, however, is that 60% of U.S. workers wind up having to retire sooner than planned, and the reasons can run the gamut from health problems preventing them from working to getting downsized out of their jobs. Therefore, if your strategy is to catch up on retirement savings later in life, you should know that you may not get that chance.
That's why you really can't afford to delay retirement savings, even when other pressing expenses seem more important. The good thing about funding a nest egg earlier in life is that the more time you give your money to grow, the more you get to benefit from compounding. Compounding is the concept of earning interest on interest, and it's what could allow you to turn a series of modest retirement plan contributions into a substantial sum over time. The following table further illustrates this point:
|
If You Start Saving $300 a Month at Age: |
Here's What You'll Have by Age 67 (Assumes an Average Annual 7% Return): |
|---|---|
|
27 |
$719,000 |
|
32 |
$498,000 |
|
37 |
$340,000 |
|
42 |
$228,000 |
|
47 |
$148,000 |
|
52 |
$90,000 |
TABLE AND CALCULATIONS BU AUTHOR.
In this example, setting aside $300 a month from age 27 means putting $144,000 of your own money into your nest egg over 40 years. With an ending balance of $719,000, you're looking at a $575,000 gain, and it's all thanks to compounding. On the other hand, if you start saving later in life, you'll enjoy fewer gains, and it'll take more money out of pocket to match the results you'd attain by saving earlier. And since you're not guaranteed the ability to save later in life, the clear answer here is to make a habit of funding your IRA or 401(k) from an early age, even if you have other financial priorities to address.
As the table illustrates, you don't need to part with thousands upon thousands of dollars each year to build a decent amount of retirement savings; you just need to start early enough in life and then let compounding work its magic. Furthermore, if you manage to save a small amount of money in your 20s, 30s, and 40s with the goal of ramping up later on, you'll have some money earmarked for retirement if your plans to keep working well into your 60s don't come to fruition.
Playing catch-up on the retirement front is a great idea in theory, but it may not work out in practice. Rather than neglect your savings throughout your career and risk falling short in retirement, make a habit of funding your nest egg consistently during your working years, and if you're able to give your savings a boost later on, even better.
