When it comes to saving for retirement, the most valuable asset to have at your disposal isn't money; it's time. If you start investing for retirement in your early 20s and do so consistently throughout your working career, it's almost trivially easy to wind up a millionaire or better in retirement, even if you have modest means.
For most of us, it will take at least 20 years or so to go from $0 saved to comfortably retired. With less time than that, compounding can't fully work its magic, and the monthly savings you'd have to cough up to build your nest egg may be too large a portion of your salary to stomach.
What makes 20 years magic?
Imagine you earn about $50,000 per year (which is near the national median household income), and you think you could retire on about 80% of that, or $40,000 per year. The average retiree receives about 40% of his or her pre-retirement income in Social Security benefits. So long as it remains solvent, Social Security would therefore likely cover about $20,000 -- half your expected needs. That leaves a $20,000 annual gap that you need to cover.
Using the 4% rule as a guide, you'd need to save up about $500,000 in present-dollar terms to cover that gap. The commonly followed 4% rule says you can spend 4% of your retirement nest egg in your first year of retirement, increase your withdrawals for annual inflation, and have a good chance of not outliving your money in a 30-year retirement.
That $500,000 will need to be adjusted for inflation between now and when you retire. After all, if you expect to maintain your standard of living between now and the end of your retirement, you'll have to keep up with inflation for the duration. Social Security benefits increase each year based on inflation, so that part of your retirement income would likely still be covered. Still, the part you're responsible for would need to be big enough when you retire to cover your costs then, in real inflation-adjusted terms.
The table below estimates what you would need to hit the future equivalent of that $500,000 mark when you retire and what you would have to sock away each month to get there, starting from $0 today:
Once you have fewer than about 20 years remaining, the monthly amount you need to save quickly jumps ahead of what might be possible on an average income. Even at the 20-year mark, you would need to invest fairly aggressively, aiming for a 10% return rate that is more or less in line with the historic long-term stock market performance.
Can you get there from here?
In 2015, if you are under age 50, you can contribute up to $18,000 in a 401(k) and up to $5,500 in an IRA. If you're at least age 50, the limits are $24,000 in a 401(k) and $6,500 in an IRA. Together, those limits work out to about $1,958 per month if you're under age 50 or roughly $2,541 per month if you're aged 50 or higher.
You can always invest outside of tax-advantaged accounts, of course. A taxable account simply won't come with the considerable tax advantages of a 401(k) or IRA, and coming up with the cash may be a little more difficult if you're not getting the up-front tax savings you get with a traditional 401(k).
On top of the legal ability to contribute, you need to actually have the cash available. A $50,000 annual income works out to about $4,166 per month. To sock away the $1,767 per month needed to likely reach your target in 20 years by investing heavily in stocks, you would need to put away a bit more than 42% of your income every month.
Is that possible? Maybe. But it depends on where your money had been going before and what kind of help you get for contributing. If you had a mortgage that is now paid off or were raising kids who are now independent, it's possible that a substantial chunk of your money is now newly available. Additionally, if your employer matches your 401(k) contribution, that match, plus your own tax deduction for contributing to a traditional plan, could help get you much of the way there.
20 years to your retirement dreams
If you're starting from scratch with 20 years to go before retirement, reaching a retirement objective of about 80% of your current income is a stretch. Still, it can be achieved with consistent dedication. The less time you have, the harder it will be. So no matter where you are on the timeline to retirement, there's no better time to get started on your plan than right now.