Retiring on Social Security alone is not a wise move. Those benefits, assuming cuts don't arrive in the future, will only replace about 40% of your pre-retirement wages. That also assumes you're an average earner.
Now it's definitely possible to get by in retirement on less than 100% of your former salary -- especially since you won't have to carve out money for your IRA or 401(k) once you're no longer working. But living on just 40% of your former income isn't ideal. So it's important to do what you can to build up a nest egg that allows you to live comfortably later in life. That means making a commitment to funding a retirement plan consistently.
A recent FinanceBuzz survey, however, finds that only 23% of respondents began saving for retirement in their 20s. And if you wait too long to start funding your nest egg, you might sorely regret it.
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Don't lose out on years of growth
The money in your IRA or 401(k) shouldn't just there in cash. Rather, your aim should be to invest your savings so your money grows into a larger sum over time. But if you don't take the opportunity to start investing for retirement in your 20s, you might miss out on years of important gains in your account.
Let's say your IRA or 401(k) generates an average annual 8% return, which is a bit below the stock market's average. Let's also say you're able to contribute $300 a month to that account based on your earnings and bills.
If you start funding your account at age 32 and retire at age 67, which is full retirement age for Social Security for those born in 1960 or later, you'll end up with a savings balance of around $620,000. And that's certainly a nice pile of cash to supplement your Social Security income.
On the other hand, let's say you start saving that $300 a month at age 22, not 32. Assuming that same 8% return, you're looking at a nest egg worth around $1.39 million at age 67. That's more than twice the balance we got in our previous scenario.
Meanwhile, that extra $770,000 in retirement savings comes at a cost of just $36,000 in added contributions over that extra 10-year savings window. And yes, $36,000 is a lot of money to part with from your early 20s through your early 30s. But isn't it worth it if it makes you $770,000 richer in time for retirement?
Make long-term savings a priority early on
It's hard to focus on retirement savings when you're first kicking off a career and have debts and other obligations to deal with. But do try your best to save some amount of money for retirement in your 20s, even if it's only $50 or $75 a month.
Over time, those seemingly small contributions could lead to a lot more retirement wealth. And when you're looking at retiring with over $1 million in your 60s, you'll be glad you made that sacrifice when you were younger.
