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When should I start saving?

Over the years of working in the retirement industry I have come across people in every stage of life, from 25 years of age to people on the verge of retirement. And a common question continues to arise, at what age should I start saving for retirement? Most Americans have trouble planning a year ahead for summer vacation much less have the ability to plan for 30 years down the road for retirement. So how do we deal with something that is so far in the distance but so important to our future.
If you think back about 35 years, Individual retirement accounts (IRAs) were just being created. There was no 401k, 403b or 457 plans. Retirement for people back then meant the three leg approach: Social Security, pension checks, and savings. Retirement didn’t last too long because life expectancy didn’t go far beyond the age of 70. The average male didn’t even make it that far.
Our retirement will be very different. You will live longer, and you’ll have a more expensive life style than your parents. Let’s look at the three leg approach to retirement. First is Social Security: The average annual Social Security benefit is around $12,000. In other words not enough to live on. Second is the Defined benefit plans also known as traditional pensions: first of all do you even have one? Only 20% of Americans even have such a benefit. If you are among the lucky few, the benefit is based on your salary and the number of years you worked for that employer. But we are a mobile society and people just don’t stay with the same employer for 30-40 years like dad did. Most of us cannot even count this as part of our income because we are part of the 80% that doesn’t have a good old fashion pension. And the third leg is our savings: of the three this is the one you have most control of. So while two of the three have some serious problems you want to make this leg as strong as possible. To save or not to save will have the biggest impact on the quality of your retirement years. Let’s look at what our retirement accounts would look like if we started at age 25, 35, 45, and 55.
If at age 25 you invested $5,000 for 10 years and didn’t save another dime and you averaged 11% return at age 65 you will have $800,000 in your retirement account.
If you wait until you are 35 and you saved the exact amount and earned the same return your retirement account at age 65 would be valued at $364,615.
If you wait until you are 45 and you saved the exact amount and earned the same return your retirement account at age 65 would be valued at $168,887.
If you wait until you are 55 and you saved the same amount and earned the same return your retirement account at age 65 would have a value of $83,227.
You can see the power of compounding, each saved $50,000 but the returns that compound are significant if you start early. So when is the best time to start saving? NOW!
Timothy Schubert