Key Points
There’s absolutely no denying the importance of saving for retirement. If you don’t make an effort to build up a nest egg, you risk ending up cash-strapped in retirement.
The average Social Security recipient today collects a little more than $2,000 per month. And those benefits will only replace about 40% of the wages you earned before retiring if your paycheck is pretty average.
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Most seniors need more like 70% to 80% replacement income to maintain a comfortable lifestyle. So it’s definitely not a good idea to retire on Social Security alone.
But there’s one retirement savings myth a lot of people tell themselves at various points during their careers. And it’s a myth that has the potential to hurt you big time.
Don’t assume there will be time to catch up
There’s a reason savers 50 and older are allowed to make catch-up contributions to IRAs and 401(k) plans. A lot of people have an easier time saving later on in their careers when they’re earning more and perhaps aren’t facing the same child-related expenses they were when they were younger.
What this means, though, is that a lot of people inevitably neglect their IRAs and 401(k)s earlier on because money is tighter, and they assume that they’ll have time to catch up on savings later on. That’s not guaranteed to be the case, though.
You never know if your career might end up getting cut short for a variety of reasons. These could include:
- Health issues
- Industry shakeups
- Bad luck that has you losing a job in your 50s and failing to find another that matches your old salary
So it’s not a good idea to completely or even largely neglect your retirement savings earlier on in your career with the plan to play catch up later on.
Don’t lose out on years of growth
Another issue with waiting to start saving for retirement? You risk missing out on many years of gains in your IRA or 401(k).
Let’s say you’re able to save $500 a month for retirement and your portfolio gives you an 8% yearly return, which is a bit below the stock market’s average. If you do that over a 20-year period, you’re looking at a nest egg worth about $275,000. If you do it over a 30-year period, you’re looking at a nest egg of about $680,000.
In the second scenario, you’re only saving an extra $60,000. The reason your balance is $405,000 higher is the power of compounded returns, which time can give you.
You may not be able to swing IRA or 401(k) contributions the minute you start working on a full-time basis. But aim to start funding your nest egg as early as possible, even if you have to start slowly.
You just can’t assume that you’ll have an opportunity to catch up later on. And if you don’t manage to build a decent chunk of savings, you risk ending up unhappy and stressed about money at a time when you’re supposed to be enjoying your life to the fullest.
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