While it is never too late to start saving for retirement, putting it off for too long can take a big bite out of your retirement nest egg.

Most individuals will need a minimum of roughly 70% of their pre-retirement income in order to maintain their current standard of living during their years of retirement. To achieve this, many individuals must start to save at the first opportunity. By starting early rather than delaying your savings for a few more years, you can considerably reduce the amount you save every month to reach your retirement goal.

Example 1
Tom and Dick, both age 21, start their first jobs, where they receive the same salaries. They share the same apartment and split their household expenses equally. During their first week at work, they attend a seminar where they learn about the benefits of participating in their employer's 401(k) plan.

Tom decides to start saving $100 from each month's salary. Dick, however, wants to wait until he is older before starting to save. If we assume an annual rate of return of 6%, Tom accumulates approximately $16,700 after 10 years. Dick starts saving at age 31, and like Tom, decides to save $100 per month. By the age of 65, Tom's retirement account would be about $253,000, while Dick's account balance, started 10 years later, would be about $132,000.

If Dick wanted to see his account balance also reach $253,000 by the same age, he would have had to nearly double his monthly savings to $190 per month, so as to make up for the lost years.


How Much Is Enough?

Your financial planner may be able to help you determine the amount you need to save in order to maintain your pre-retirement standard of living. Understandably, factors such as inflation and changes in income tax rates may alter the projected amount. However, having an idea of what you need for your future retirement makes it easier to determine if you are saving enough. The following example illustrates how to determine how much is enough.

Example 2
Sam meets with his financial planner who determines that Sam needs to accumulate at least $1,000,000 by the time he reaches his desired retirement age of 50. Sam's monthly-required savings is determined by his projected rate of return, the amount he has already saved and his current age.

Sam is age 25 and has a savings of $5,000. Assuming an annual rate of return of 6%, he will need to save an additional $1,400 each month to reach his desired goal. If Sam were 30 years old, his required savings would be approximately $2,100 per month: a five year delay increases Sam's required savings by $700 per month.

If the limitations placed on the amount you save in your employer-sponsored plans and your IRAs are not sufficient to meet your goals, talk to your financial advisor about other savings vehicles – such as regular savings, certificate of deposits, stock, bonds or mutual funds – that would better suit your financial profile.

On the other hand, if you are unable every month to save the amount required to reach your goal, you may still want to save whatever you can afford, as that will help defray your expenses during your retirement years.

The Bottom Line

Early financial planning helps to ensure a financially secure retirement. Explore all the options that are available and choose the ones that are right for you. Be sure to inform your financial planner of all your other expenses so that he or she can help you to make realistic plans. If you plan to start later, later may never arrive, as the reasons for putting off saving for retirement may increase, between mortgage, car payments and college expenses for any children. 

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