From time to time, I read or hear all of these financial experts talk about saving for retirement and the importance of saving as much as you can as early as you can. Those sound bites are great and all but what does it mean? Well, if you are reading this and in your twenties – what perfect timing! Let’s discuss the importance of time when it comes to saving for retirement.
Using the compound interest calculator from the SEC, you can compare different monthly savings rates and rates of return for different age groups very easily:
SEC Compound Interest Calculator
- A twenty year old who initially started with a $1000 in their retirement account would need to contribute roughly $450 per month to accrue roughly $1.1 million by the time they are 60 years old – given a annual return of 7% (interest is calculated annually in this scenario).
- A thirty year old who also started with a $1000 would have to contribute double the amount at $900/month to accrue $1.03 million by the time they were 60 years old.
- A forty year old who started with $1000 would have to contribute $2100/month to hit that magic $1 million mark, again given a return of 7% annually. Which by the way is more than the allowable 401k max of $19,000 for 2019 (bad news for you Mr./Ms. Forty year old).
The mathematicians out there will beat up on this simplistic example but again the exercise is what’s important. I would suggest all you readers to sit down a play with this calculator to experience the visceral feeling of what it would take to secure that first million (make sure you hit Refresh, sometimes the calculator doesn’t update and you have to re-enter your numbers).
Try increasing your initial investment to see how significant the monthly payments can decrease. What if you took your graduation money or took a portion of your high school/college job and socked it away? What if your initial deposit or starting point was $10,000 instead of $1000? Or $20,000? $30,000? Keep increasing that starting amount / initial savings amount you incredible stud (ent)! You saw that, awesome play on words there if I say so myself!
Wife comment: Not really…..
Ultimately what this calculator shows you is that saving for retirement has three components: the amount you set aside, the rate of return and the time frame. The longer you have to save – the less you have to save over time with all things being equal!
For those of you in your twenties or still students, financial aid is not affected by whatever you have in your retirement account! The psychological impact of starting your retirement savings early in life cannot be discounted as well. Imagine your willingness to put up with that crappy job or boss knowing you are putting away $200-400 per month and being able to say Adios to them and thanks for the employer match. Or being able to take the risk on that dream job that pays peanuts because you have enough saved up to consider that.
I’m not saying that having money in the bank is going to make you happy but…wait…
No! Hell Yeah I’m Sayin’ Dat! I am saying that having a million dollars in the bank is making me happy and knowing that I can say “See Ya!” to my boss tomorrow feels great!
Wife comment: You know he does say “I quit!” with this weird grin on his face when he looks at that Retirement account…
I don’t say that! I do say, “My Precious” while stroking my computer monitor once in awhile but everybody does that…don’t they?
Give the calculator a shot!