Getting to a comfortable retirement can be a remarkably straightforward task. Indeed, just three simple steps form the foundation of that key financial goal. Those steps: Save early, save often, and save more. In large part, everything else is just implementation details.
Is that straightforward? Yes. Is it simple? Yes. Is it easy? Not so much. Life has a way of getting in the way of those steps, but as you'll soon see, reaching that combination isn't as scary or as difficult as you might think. Once you get in the habit and you start seeing the balance in your retirement plans increasing, you'll be incredibly glad you did.
Step 1: Save early
If you can scrape together $500 to start your journey, that money can start working for you as soon as it is invested. The sooner you can come up with that cash, the longer it can work for you, and the larger the amount it can turn into by the time you retire. The chart below shows what that single $500 investment can turn into over the course of your working career, depending on the rate of return you earn and the number of years you let it work for you:
|
Years |
10% Annual Returns |
8% Annual Returns |
6% Annual Returns |
4% Annual Returns |
|---|---|---|---|---|
|
40 |
$22,630 |
$10,862 |
$5,143 |
$2,401 |
|
35 |
$14,051 |
$7,393 |
$3,843 |
$1,973 |
|
30 |
$8,725 |
$5,031 |
$2,872 |
$1,622 |
|
25 |
$5,417 |
$3,424 |
$2,146 |
$1,333 |
|
20 |
$3,364 |
$2,330 |
$1,604 |
$1,096 |
|
15 |
$2,089 |
$1,586 |
$1,198 |
$900 |
|
10 |
$1,297 |
$1,079 |
$895 |
$740 |
Source: Author's calculations.
No matter how many years you have left in your career, the one thing that's abundantly clear is the fact that the sooner you get started saving, the larger your investment can potentially grow. If you haven't made saving for your retirement a priority before now, there's no better time than this instant to get started.
Step 2: Save often
Take that same $500, but instead of a one-time investment, make it a repeated investment, every month. If you take that money directly from your paycheck in the form of a 401(k), 403(b), or TSP contribution (depending on what your employer offers), you can even make it automatic. Between the automatic nature of those direct-from-your-paycheck contributions and the tax benefits you get from investing in those plans, it becomes virtually painless to keep the investments going once you start.
The table below shows what you can end up with by simply repeating that $500 contribution once a month, based on the number of years you can keep it up and the rate of return you receive:
|
Years |
10% Annual Returns |
8% Annual Returns |
6% Annual Returns |
4% Annual Returns |
|---|---|---|---|---|
|
40 |
$3,162,040 |
$1,745,504 |
$995,745 |
$590,981 |
|
35 |
$1,898,319 |
$1,146,941 |
$712,355 |
$456,865 |
|
30 |
$1,130,244 |
$745,180 |
$502,258 |
$347,025 |
|
25 |
$663,417 |
$475,513 |
$346,497 |
$257,065 |
|
20 |
$379,684 |
$294,510 |
$231,020 |
$183,387 |
|
15 |
$207,235 |
$173,019 |
$145,409 |
$123,045 |
|
10 |
$102,422 |
$91,473 |
$81,940 |
$73,625 |
Source: Author's calculations.
If you've got enough time and earn a decent enough rate of return, that simple $500 per month investment can potentially turn into well over $1 million by the time you're ready to retire. Even if you don't get to $1 million or more, check out the difference between what you wind up with by repeatedly investing $500 vs. investing only once.
Step 3: Save more
If you're too close to retirement to reach your goal via a $500 per month investment, there's no need to despair. There's no rule that limits you to saving only $500 per month. Indeed, in your 401(k) or other similar employer sponsored plan, you can contribute as much as $18,000 per year -- or $24,000 per year if you're aged 50 or older.
- The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan is increased from $5,500 to $6,000.
Add another $5,500 per year in your IRA (or $6,500 if you're aged 50 or older), and it's quite possible to get well above that $500 per month level in retirement accounts.
- The limit on annual contributions to an Individual Retirement Arrangement (IRA) remains unchanged at $5,500. The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000.
If even that's not enough for you to reach your goal by retirement, you can always invest more in a standard brokerage account and simply earmark the money as going toward your retirement. For most of us, though, it's more a matter of everyday life getting in the way of saving for the future. If you're in that boat, where you'd like to save more than you currently can, you should be aware of and take advantage of opportunities to increase your savings when they arise. Some opportunities include:
- Every time you get a raise, as long as you were making ends meet on your previous salary, that new income offers an incredible opportunity to increase your savings.
- Every year, the tax brackets adjust for inflation. That makes it likely that your January paycheck is larger than your December paycheck and gives you some extra wiggle room to invest.
- Whenever you finish a financial obligation, look at the freed up money as an opportunity to invest. Mortgage paid off? Kids grown and independent? That's money available for your future.
Three simple steps -- one comfortable retirement
Saving for your retirement doesn't have to be painful, but it does take both time and consistent execution for you to have a solid chance of reaching your goal. By following those three simple steps of saving early, saving often, and saving more, you can get yourself much better financially prepared for the retirement you've been hoping to have. That first step, save early, is critical, and you will never again have any earlier time than right now to get started. So, what are you waiting for? Get started now.
