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The Big Problem With Putting Off Retirement Planning Until Your 40s

By Kailey Hagen – Feb 20, 2020 at 10:05AM

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It can cost you in more ways than one.

When you're young, retirement seems far away -- too far away, in fact. You still have decades left in the workforce before you can even think about kicking back and enjoying more than a few weeks off at a time. But though the hours in the office might crawl by, the years seem to come and go in the blink of an eye. Before you know it, you're halfway to retirement.

Unfortunately, most people wait until then to begin planning for their senior years. Near-retirees (those planning to leave work in the next 10 to 20 years) didn't begin seriously planning for retirement until about 42, according to a study from the Empower Institute, while current retirees reported that they didn't begin planning until 47, on average.

A pensive young woman sitting on park bench

Image source: Getty Images.

It's not that it's impossible to have a comfortable retirement if you wait this long to begin planning, but you do make things a lot more difficult for yourself. Here's why and how you can start creating your retirement plan today.

Delaying retirement planning costs you money

If I were to ask you whether it was better to set aside $50 per month for retirement for 30 years or $150 per month for 15 years, you might be tempted to pick the latter. You're only contributing for half as long, but you're contributing three times as much, so you should still end up with more, right?

Actually, that's not true. If we assume a 7% annual rate of return for both examples, you'd end up with a little under $57,000 if you contributed $50 per month for 30 years. If you'd set aside $150 for 15 years, you'd only have a little over $45,000.

That's because the money you invest when you're younger has more time to grow, so it ends up being worth a lot more in the end. Consequently, you don't have to contribute as much of your own money per month when you start young in order to have enough. When you delay saving for retirement, it takes a lot more savings per month to reach the same final dollar amount, so you usually end up using a bigger portion of your income on retirement savings.

Delaying retirement might force you to change your retirement plans

Hopefully you still set aside some money every month even if you haven't crafted a detailed retirement plan yet. But you can't just let that be good enough. Without a plan, you don't know how far the money you're setting aside will get you, and you could be scrambling to catch up when you're older.

If you put off retirement planning until your 40s and then realize that you cannot afford to save as much as needed each month to reach your financial goal, you might also have to rethink your retirement. You may have to spend a few more years in the workforce or give up that trip around the world you've been planning so that you can get by on your smaller nest egg. 

If you're really far behind on retirement savings, you may find there isn't anything you can do to catch up. You might have to rely on the government, your children, or other family members to support you. That may not be the lifestyle you want, but it's a real possibility if you only give yourself a couple of decades to save for what could be 30 or more years of retirement.

How to plan for retirement now

The first step is to estimate how much your retirement will cost you. You do this by subtracting your planned retirement age from your estimated life expectancy to get a rough retirement length. Then, multiply your estimated annual expenses by the number of years of your retirement, adding 3% annually for inflation. A retirement calculator can do this part for you. It'll also calculate how much your investments might grow over time. Use a 5% or 6% annual rate of return, even though your money might grow faster. You want to be prepared for the worst-case scenario. Once you've entered all this in, your calculator should tell you how much you must save per month and in total to reach your goal.

Subtract the current value of your retirement account from your savings goal, plus any money you expect from Social Security, a pension, and a 401(k) match to figure out what you must save on your own. Create a my Social Security account if you're not sure what to expect from those benefits.

Set aside as much money per month as your retirement plan recommends if you're able to, or rework your budget or retirement plan if not. You could try cutting discretionary purchases to free up more cash for retirement savings or delaying your retirement by a few years. This gives you more time to save while also reducing how much you need to save.

Reevaluate your retirement plan at least once per year to make sure you're on track. If your retirement goals change significantly, you might have to create a new retirement budget. These adjustments are easier to make when you look over your plan periodically as opposed to waiting until you're on the eve of retirement.

Whether you're 20 or 40, now is the best time to start planning. If you don't have a retirement account or you're not sure how much you should be saving per month, set aside a half-hour or so to figure it out, so you're not scrambling to fund your retirement in your 50s and 60s.

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