Despite the wealth of financial knowledge available today, there is still a surprisingly persistent question among workers of all ages: “At what age should I begin saving for retirement?” The answer is simple: as soon as possible. There is no age that is “too young” to begin saving for retirement.
Initial Investment at Different Ages
To illustrate the advantage of starting to invest in your retirement early, I wanted to calculate the result of various initial investment ages and plot the results on a chart. I calculated the difference between starting at ages 22, 25, 28, 31, 34, and 37. I also made some basic assumptions:
- Investments grew at a consistent 9% rate each year.
- Annual contributions of $5,000 up to age 49.
- Annual contributions of $6,000 from age 50 onward.
- Contributions continued to age 70.
- Retirement age of 70 (Bear with me… Other ages are compared below…)
- Withdrawn funds are not subject to tax.
Aside from the growth rate and retirement age, the assumptions above are consistent with a Roth IRA plan. I have made the source data and calculations available on Google Docs. Click the following link to open the spreadsheet and make your own adjustments to the assumptions.
Each scenario could be imagined as a different person. I refer to them as “Saver 22,” “Saver 25,” and so on. “Saver 22” indicates the person began saving for the retirement at age 22. I know, creative. The spreadsheet linked above shows their respective portfolio values by year in a column format. I also plotted the values on a graph to illustrate the dramatic difference.
Roth IRA Savings and the Impact of Waiting to Begin
The graph shows the six savers’ portfolios indicated by different colored lines. The monetary impact of delaying your initial retirement investment becomes more pronounced with age. “Saver 22” will have $400,000 more than “Saver 25” at age 60. There will be a $600,000 gap between the two of them at age 65, and a whopping $1,000,000 difference at 70. This is the power of compound interest in action.
Of course, this is only a theoretical graph. Everyone’s retirement portfolio’s track record looks different and it’s safe to say everyone doesn’t achieve 9% returns every year. Furthermore, career paths dictate different schedules in terms of earnings. For example, a business person may start earning $50,000 in their early twenties and be able to comfortably follow the saving trajectory in the graph above. In contrast, a doctor may not start earning much more than a residents salary until their early thirties when they will make well into the six figure range. Anyone in a high-paying career, such as a doctor, should invest in a different IRA which will allow for more than $5,000 annual contributions.
With that said, we all can’t be doctors or lawyers and this graph still retains plenty of real-world applicability. Once you’ve started to save, the next step is understanding how much longer you need to work.
Initial Investment and Impact on Retirement Age
Two basic lessons can be learned from the saving comparison chart above:
- Investing early contributes significantly towards building wealth.
- Working until you’re 70 contributes significantly towards building wealth.
However, most of us didn’t necessarily start investing early and don’t want to work until age 70. So when can you retire? The answer depends on how much annual income you feel is necessary and how long you will live. I took the same calculations a step further to illustrate the options.
Retirement Age and Expected Income
In the graph, “Retirement Age and Expected Income,” I used the same calculations for the six previously-mentioned savers (Saver 22, Saver 25, etc). The values of each saver’s portfolio is separated into three main rows according to retirement ages of 60, 65, and 70. The rows are further separated by life expectation. The “heat map” coloring was added to illustrate the transition from lowest values (indicated by red) to the highest values (indicated by green). For example, the person who began saving at age 25 (“Saver 25”), wants to retire at age 60, and expects to live for 25 more years, can plan on having an annual income of approximately $52,000. The annual income is limited by the hypothetical saving scenario that we already created in the spreadsheet above (reminder: 9% growth, $5,000/yr contributions until age 49, $6,000/yr afterwards).
Aside from the income being based on the previous calculations, there were some other assumptions. The income does not take into account any other investments, pensions, or social security (Let’s be honest, if you are less than 55, don’t plan on receiving social security anyway). Additionally, the income levels do not take into account the continued growth of the hypothetical Roth IRA portfolio which will continue to occur as money is withdrawn. With that said, these calculations still achieve their purpose of illustrating the affect of delayed investing and early retirement.
Full Speed Ahead
If you happen to be one of the enlightened few that started saving for retirement young and contribute frequently, congratulations! You are well on your way to financial freedom.
If you did not start saving at a young age, don’t panic. This doesn’t mean you will never be rich. This just means in order to be rich, you will just have to be a little more proactive. Here is your game plan… The first step is to set up a Individual Retirement Account (IRA) as soon as possible. Contact the benefits manager at your employer to determine which IRA options are available to you at work. If your employer doesn’t offer a retirement plan, there are literally hundreds of banks, brokerage firms, and mutual fund companies you can choose from to help you open a Roth or Traditional IRA account. Make sure you contribute the maximum amount possible (considering your other financial obligations) and the contributions are made automatically.
As mentioned above, everyone’s financial situation is different. If your retirement savings does not align with the calculations shown above, it may not be indicative of a problem. If you have questions, please post them in the comments section below!
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