The other day I was walking around a bookstore and found myself at the magazine rack. Naturally I was at the business section since I enjoy personal finance. I noticed that many of the magazines had headlines about needing millions in order to retire. I get the fact that they make these headlines to stand out from the crowd, but as an onlooker, it can be overwhelming to think about retirement. After all, I look at my 401k plan and see I am nowhere near $1 million dollars! The thought of how to get my account balance to that level when money is tight seems impossible.
But it can be done. I can say this because I understand how saving and interest work. Most people do not. They simply see that they have $2,500 in their 401k plan and therefore are short $997,500. That number is defeating and so they just give up.
But you have to push forward. You can make up that difference. All you have to do is save.
Save Something For Retirement
That is the key: to just save. If you can save $50 per week in your 401k, then do that. If you can save more, great save more. The goal is to just make it a habit to save money.
You might be thinking though, why save $50 a week? Isn’t that pointless? The truth is, it is not. If you can save $50 per week, that comes to $2,600 per year. Over the course of 35 years of working, you will save just shy of $100,000.
You might think I just proved your point about not bothering with saving. On the surface you appear to be correct. But I haven’t factored in interest yet. When you add interest to the equation, saving $50 per week for 35 years gets you to $385,000. Not too bad, right?
Granted you aren’t at $1 million dollars, but you are over 1/3 of the way there and all you did was save $50 per week.
Ignore The Headlines
Here is the second reason why you need to save something, anything for retirement. You probably won’t need $1 million dollars. Those headlines are to get your attention. What are your annual expenses now and which ones won’t be around when you retire?
You won’t have to buy clothes for work or have them dry-cleaned. You won’t be driving to work every day either. Hopefully your house will be paid off as will your cars. You won’t have student loans any longer.
All of these expenses will be gone. This means you will need less money to live on when you retire. Let’s say you have annual expenses of $40,000 now. After you take out loan payments that will be gone when you retire, your annual spending is $25,000. It we multiply that by the length of retirement, say 25 years, we get to $625,000.
If you only save $50 per week, you are over half way to this number. We have no idea what will happen to Social Security in the future but that could make up some of that difference. Or you could increase your savings rate as your salary increases over the years.
The point is you need to save something for retirement. At this point, you don’t know how much you really will need for retirement. So the best thing you can do is to save any amount you can. As I showed you, interest makes a huge impact on how much money you end up with. But if you don’t save anything, there will be no added benefit from interest. So save something and take advantage of compound interest.
As you get older and start to create a formal retirement plan, you will be thankful you were smart enough to start saving young.