Please ensure Javascript is enabled for purposes of website accessibility

68% of Middle-Aged and Older Workers Share This Retirement-Planning Regret

By Maurie Backman - Jan 31, 2020 at 10:18AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Here's a chance to learn a valuable lesson.

It's easy to look back on the financial decisions we've made in the past and kick ourselves for not doing better. But it also pays to learn from the mistakes of those who made them before us.

TD Ameritrade recently asked Americans age 40 to 79 to think back on the ways they could've approached retirement savings differently, and 68% said they wish they'd started socking money away earlier in life.

If you're in your 20s or 30s and have yet to begin contributing to an IRA or 401(k), you'd be wise to take the advice of your elders and start carving out money for the future. Wait too long, and there's a good chance you'll come up short.

Middle-aged man with serious expression outdoors

Image source: Getty Images.

An early start is crucial

The sooner you start setting money aside for the future, the more opportunity you'll get to take advantage of compounding. In its basic form, compounding is the concept of earning interest on interest (or accruing interest on interest, in the case of credit card debt).

Here's how it applies to retirement savings: Imagine you put $5,000 in your IRA or 401(k) at age 28, and by 29, your balance grows to $5,300 thanks to the returns that your investments in the account generated. At that point, you can then earn returns not just on your initial $5,000 contribution, but also on the extra $300 you have in your name. Keep that up year after year over a lengthy time frame, and you could wind up with an astonishing amount of money.

In fact, let's say you're able to start socking away $250 a month in your IRA or 401(k) at 22, and you continue doing so until 67. If you load up on stocks in your retirement plan, you're likely to generate an average annual 7% return, since that's a few percentage points below the stock market's average. When we apply that 7% return to those $250 monthly contributions over a 45-year period, we arrive at an ending balance of approximately $857,000.

Now, let's compare that balance to the amount that went into that account out of pocket. A monthly contribution of $250 means $3,000 a year, and 45 years of that brings us to $135,000. But since we wound up with $857,000 in total savings, that means $722,000 of that came from investment gains alone, all thanks to the power of compounding.

But watch what happens when you shorten your savings window to 25 years. Assuming the same monthly contribution and average annual return, you'll be looking at an ending balance of about $190,000. Meanwhile, you're talking about $75,000 in contributions, representing just a $115,000 gain. That's still a decent gain, but it's nowhere close to $722,000.

The point? Don't deprive yourself of years of growth in your retirement plan. You need lots of savings for your senior years to cover your living expenses, so much so that many financial experts recommend closing out your career with 10 times your ending salary put away. If you want a shot at meeting that goal, save from a young age. That way, you'll be able to look back without regrets.

Maurie Backman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

TD Ameritrade Holding Corporation Stock Quote
TD Ameritrade Holding Corporation

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/08/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.