I'm often struck by these lyrics to a song by the late, great John Lennon: "Life is what happens when you're busy making other plans." That's great advice -- but it is possible to do both. That is, live and enjoy life now while making plans for retirement. The moves you make now will certainly pay off when you want to enjoy life then, in retirement.
It may seem like a long way off when you are in your 30s, but the earlier you start planning for retirement, the more flexibility you will actually have to retire early -- if you are so inclined to do so. And the earlier you start, the less of a financial impact it will have on your daily life now, as opposed to playing catch-up later.
In fact, if you are in your 30s and are planning to retire in 2050, just doing these two simple things can have a huge impact on your savings without taking much out of your paycheck now.
1. Take advantage of free money
If you work for a company that offers a 401(k) or has an employer-sponsored retirement plan, you are leaving money on the table if you are not getting the full company match. It may be tempting when you are younger to keep more of your paycheck each month to pay for kids, college loans, mortgages, pets, entertainment, family members, cars, and any number of things that require our day-to-day attention.
But if your company offers, say, a 4% match, and you are contributing less than that to your plan, you are leaving free money on the table. Let's get out the old investment calculator, shall we?
If you are age 35 and are making $50,000 per year, and want to retire in 2050 at age 62, and you contribute 2% of your salary to your plan, when the company match is 4%, you'd have $327,000 by 2050 -- assuming a 3% annual raise and a 10% annual return.
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If you bumped that up to 4% per year, that would be $1,000 more dollars out of your paycheck every year, and if you get paid every two weeks, just $38 per paycheck.
So, for $38 more per paycheck, you would get another 2% per year in free money from your company. Using the same scenario as above, except bumping it up to a 4% contribution and match, you would have about $655,000 by 2050. That's about $327,000 more -- twice as much for putting just $38 per paycheck more toward retirement.
2. Deploy your assets for aggressive growth
As the above example shows, in addition to taking advantage of free money, time is one of your best allies, so it is critical to start as early as possible. Another way to boost your retirement nest egg without taking any more money out of your paycheck is to change your asset allocation. You can do this in your retirement plan without even having to invest any additional money besides your contributions.
The longer runway you have until retirement, the more aggressive you can become in your asset allocation. Over the long term, growth funds and stocks have outperformed value stocks, fixed-income investments, and other types of more conservative investments.
Growth investments are much more volatile in the short term, like last year, for example, when the Nasdaq 100, an index of mostly growth stocks, was down about 33%. But with 27 years until retirement in 2050, you have plenty of time to ride out these wild swings and take advantage of the higher growth that these stocks generate.
If you go back 20 years and look at the returns of the S&P 500, the S&P 500 Value index, and the tech-heavy, growth-oriented Nasdaq-100, you can see the stark difference in performance -- as the chart above shows.
The Nasdaq-100 has returned 13.4% per year, on average, while the S&P 500 has an average annual return of 7.8%, and the S&P 500 Value Index has returned 6.3% on an annualized basis as of May 19. Plugging those numbers into our calculator, a 13.4% annual return over 27 years, using the same inputs as above, would amount to more than $1.1 million. In contrast, a 7.8% annual return would amount to about $467,000.
Now, you wouldn't have your entire portfolio in a Nasdaq-100 fund, and you would want to have a more conservative allocation the closer you got to retirement because you don't want a year like last year wiping out one-third of your savings. But when retirement is 25 years out, you want to hold more stocks than bonds and more growth than value or index funds.
The proper percentage depends on your risk tolerance, but there are many different resources out there that can help you with your asset allocation and diversification by age.
Just doing these two simple things can help you boost your retirement savings over the long haul without having to expend a lot of effort or resources now.
