How much are you currently saving for retirement? If the answer to that question is either "nothing," or "not enough," chances are there are some good reasons you've hesitated to start investing for your later years. But whether you struggle to find spare cash or are simply not sure how to begin, you need to get started contributing to retirement accounts now.
As difficult as this may seem, there are three big reasons you really can't afford to delay.
1. Social Security isn't enough to support you alone
Having retirement savings isn't optional -- it's necessary to avoid living a life barely above the poverty level as a senior. See, Social Security is meant to replace only around 40% of pre-retirement income, and the average benefit in 2021 would leave you with a grand total of $18,516 in annual income. That's just not a feasible amount for most people to survive on. But without retirement savings, you'd have no options. Don't put yourself in that position by waiting to start saving until it's too late.
2. Compound interest can make it easier for you to amass the money you need -- if you start early
Chances are good you're going to need a large retirement nest egg to have a comfortable quality of life in retirement. In fact, let's say you want around $46,000 in household income in your later years. That's close to 80% of median earnings of people ages 55 to 64 so it's a reasonable number given that most experts recommend replacing 80% of your pre-retirement salary.
If you get close to the average Social Security benefit of $18,516, you'd need your nest egg to produce about $27,484 in household income. Assuming you follow the 4% rule and withdraw 4% during your first year of retirement and make adjustments to keep pace with inflation every year, you'd need around $687,100 invested for your retirement.
If you start saving when you're 30 and retire at 65, you'd need to put around $3,990 away each year assuming an 8% average annual return on investment. That's most likely doable. But if you delay saving until age 45 and want to retire at 65, your required annual investment grows to $15,025. That's a lot harder to come up with.
You can save much less when you start earlier because you begin earning a return on investment as soon as you put your money into the market. The returns you earn are reinvested and also earn money for you. This process, called compound interest, helps wealth to grow faster when time is on your side. But in order for time to be on your side, you should start investing now.
3. You miss out on tax breaks for any year you don't save
Every year, the government offers you help in investing for your future. If your income is low enough, you can qualify for the saver's credit, which provides a dollar-for-dollar reduction on your tax bill with a credit valued at up to 50% of the first $2,000 in contributions for singles or $4,000 for married couples. Many people can also qualify for tax deductions for contributions to 401(k)s, IRAs, and HSAs.
In order to take advantage of these deductions and credits, you must contribute to your retirement investment accounts each year. If you don't make any contributions for 2020, you'll never get that chance back and will forever miss out on all the government help you could've gotten this year.
The bottom line is: Your retirement is going to be very difficult financially if you don't have money saved. You can't afford to miss out on compound interest or government subsidies to help you hit your investment goals, so you need to start saving today in order to take advantage of both. If you're financially struggling due to COVID-19, you aren't alone -- but if you can cover your bills and have even a little extra left over, consider investing it for retirement. Even if you must start small, saving something is better than nothing, and your balance should grow over time.