When Might be the Best Time to Start Saving for Retirement?

Don’t you hate it when you ask someone to provide an answer to something serious, and they do so by asking a question back?

Hello, I’m the one with a question… and I’m looking for an answer.

Worse yet is when you ask a question and what you get in return is more than one answer, each of which seems contradictory to one other.

You can’t help but wonder If someone is messing around with you, or that maybe you asked the wrong person…

Today we are going to examine just such a scenario when it comes to planning for retirement.

The Main Question

One of the most frequent questions many people have when it comes to their financial future is, “When do you start saving for retirement?.”

Quite often there is a follow-up question they ask themselves – “Have I started too late.”

Well, to the main question, there are in fact two answers. First, you need to start as young as possible – best to do so in your 20s.

Unfortunately, the person asking the question is often already in their 30s, 40s or 50s.

As such, the “second half of the answer to the main question is, “But it’s never too late.”

Truth is those two statements are part of the same answer and they are not contradictory.

You do need to start as early as possible, but from a practical standpoint many fail to do it, so they need to know that no matter what age of life (other than very advanced years where it can be nearly impossible), it’s not too late to start.

Starting Early Makes a Huge Difference

There are all kinds of studies and anecdotal advice and information that you’ve surely heard regarding saving to establish financial security for you and your loved ones, starting early in your career and continuing throughout, even into your retirement.

When it comes to saving for retirement, time is a big issue.

Early on in our professional careers, we tend to have so much going on and often feel we have little left over in the budget to be able to save. This is especially true when it comes to saving for retirement, which when you’re 20 or 30 feels like a far-off pipe dream.

That said, we can start with relatively small investments on a regular basis that don’t hurt the budget and allow for the savings process to start. And by starting early and setting that money aside, you build in the good habit of saving and letting your funds build slowly and steadily over time.

A quick review of that principle is what occurs when leaving money in some type of interest-bearing account from one year to the next. The result is what we call compounding – you have interest on top of the original principal in the account, so you now have more money at the end of the year.

Compounding multiplies money at an accelerated rate. When saving, the greater the number of compounding periods, the greater the compound interest will be.

Transferring that concept into the guise of a retirement account, you not only gain the benefit of compounding interest, but you also benefit from a very powerful feature the government not only allows, but actually encourages – tax-deferred savings.

Why is that important?

Utilizing a tax-qualified retirement account, like an Individual Retirement Account (IRA), you are able to invest up to a certain amount of money each year before it is taxed, reducing your current taxable income.

The net result is you pay less tax on your income now, invest the difference, and allow that amount, along with what you’ve been investing in the IRA, to compound and grow…hopefully for decades.

You will eventually have to pay the tax that has been deferred, but you’ve gained the enhanced benefit of more money to invest and compound over all those years in-between.

Time and Compounding Interest

(See our OHFG Retirement Nest Egg Calculator)

Let’s assume that the account averaged a return of 5% annually over those 40 years. Your approximately $49,000 investment would have grown to approximately $160,000!

Let’s take a look at a couple of examples of compounding interest starting young.

Had you invested an extra $50 to your monthly investments ($150 monthly X 480 monthly contributions) for the same 40 years, at the same average return of 5% annually, your total contribution of $73,000 would have grown to more than $236.000!

 

Keep in mind that the initial investment was pretty modest, just $1,000. That’s certainly doable for many in their mid-20s. And each month thereafter just $150.

Now let’s change the scenario a bit: after 10 years you are making a fair amount more and decide you want to contribute more each month to really ramp up your savings.

At that point, your initial contribution of $1,000 and 120 subsequent monthly contributions have grown to approximately $25,000. You decide to start contributing $350 per month, an increase of $200 monthly. And you do so for an additional 30 years.

In total, after the same 40 years averaging a 5% annual return, starting with just the $1,000 and then adding that which you invested monthly (10 years/120 payments at $150, and 30 years/360 months at $350), your account would have grown to approximately $403,000.

One last example to demonstrate the power of starting to invest for retirement early.

If you invested $3,000 annually (small investments of $250 per month) and did so for 10 years, averaging a 5% annual return, your investment of $30,000 would have grown to nearly $38,000. If at that point you stopped investing but left that money in the account, continuing to earn an average annual return of 5% over the next 30 years, your account would have grown in value to approximately $164,000.

Obviously, that wouldn’t be a good retirement plan, saving some for just 10 years and then not saving any at all for the next 30 years as you approach retirement.

But this example does show the importance of starting early and gaining the full benefit of the two most important elements in retirement planning – time and compounding.

If instead you waited 10 years and started investing in your mid-30s, say $250 per month ($3,000 annually), for 30 years, earning 5% annually, your $90,000 investment would grow to just less than $208,000.

 

Granted, you have to find a balance between savings and the practical side of life in terms of your monthly budget and all of the things that come your way over the course of your lifetime.

But, without a doubt, the best answer to the question of when to start planning is you need to do so as early as possible. Time and compounding are the keys, so the earlier the better.

Never Too Late

We started by talking about advice that would seemingly appear to be contradictory.

• The best time to start planning and saving for retirement is early.
• It’s never too late to start planning and saving for retirement.

The fact is both can be true, as they account for the reality in life that while all should start early, like in their 20s, many don’t.

(Bankrate survey, September 21-23, 2022).

With that reality as a background, many people know they should have started early, but that doesn’t do any good for them now. As such, the answer in terms of when to start is right away…and they need to save as much as possible each year for their remaining “earning” years.

An example of this would be someone now 50 who has saved very little to nothing for their retirement planning.

Let’s say this is you, and you now begin to worry about retirement. So you decide you are going to put as much into savings as possible. And the good news is you make quite a bit more in salary than when you were younger, so you can afford to put in a fair portion of money each year.

You start investing $10,000 each year (approx. $833 monthly) into an annuity over 15 years till you’re 65, earning an average return of 5% annually. In this scenario, your savings would have grown to approximately $222,650 at the end of the 15 years.

 

So, When DO You Start Saving for Retirement?

What we just covered should demonstrate three very important facts:

• Starting early can make saving for retirement much easier as you gain the full benefits of time and compounding.
• Starting later, even much later will require more pain, but it is doable. You’ll have to invest much more monthly because you’ve lost critical time by delaying. But generally speaking, many do make much more in their jobs later, so it is realistic there can be money in the budget to do so.
• All that said, even over a modest period of time (example – 15 years), you can use compounding to your benefit to grow your retirement savings. With this in mind, it’s important for you to take to heart the point that it is never too late to start. Your ability to proactively address your retirement, even starting relatively later in the game, can still make a significant difference in your advanced years.

Wherever you are in your life, and no matter what you have done in terms of saving and planning for retirement, we believe you should work with a qualified investment advisor or retirement planner to help guide you and create a realistic plan that will act to steer you.

We’d be happy to review your existing plan or build a new one specific to your situation. Our overall approach is to incorporate a holistic model that considers all your assets, tools, and accounts, with the goal of providing a comprehensive plan built specifically to your needs and goals in retirement.

If you’re ready to take the next step and talk to a team of financial advisors and retirement planners who put your interests first, Schedule a call today!