Saving when young pays off for retirement
In celebration of National Retirement Security Week (Oct. 20-26), an effort to raise public awareness about the importance of saving for retirement, let’s talk about how to take advantage of one’s youth.
It’s almost unnatural to expect someone just starting a working career to save for a retirement goal that is 40 to 50 years into the future. No matter the size of the paycheck, there is always something that can distract one from a longterm savings goal — from consumer purchases that perhaps could be delayed to student debt that needs to be managed.
Many times, however, the decision to save or spend is made in a vacuum. With the benefit of hindsight, retirees regret not making that save versus consume decision wisely — that is, they wished they had started saving and investing earlier (and more).
If workers in their 20s only knew about the leverage they can get when they participate in their 401(k) plans at work, they would be more likely to start early.
Because of their structure, 401(k)s accelerate savings outcomes, especially if they offer company matching.
Those who can benefit most may not realize what they are giving up. They need to be educated and urged to participate.
Let’s look at a quick comparison of time horizons based on age (age 22 versus age 30), and let’s use actual market data, focusing on the worst possible time to be investing in the stock market over a 30-year period using an S&P 500 index fund as a representative investment.
Let’s also assume that both employees contributed $150 a month, adding 3 percent per year as their paychecks rose over time.
Now, to illustrate the advantage of starting to contribute to a 401(k) at an early age, let’s assume both stopped contributing after 30 years. By then, their contributions ($85,786), which were invested in an S&P 500 index fund, had grown to just under $300,000.
Next, let’s add the element of time to age 70. That’s an extra 18 years for the 22-year-old and an extra 10 years for the 30-year-old. No additional contributions are added, only time for the investments to develop further.
The 70-year-old who started his 401(k) at age 22 has $4,096,207 after stopping contributions at age 52 (22 plus 30).
The 70-year-old who started his 401(k) at age 30 has $1,193,532 after stopping contributions at age 60 (30 plus 30).
The only difference between the two is the time horizon.
Each could leverage his savings even more if he was lucky enough to have a 401(k) with a match.
Assuming a dollar-for-dollar match, at age 70, the saver who started at age 22 would have over $8 million, and the saver who started at age 30 would have about $2.4 million.
Growing a substantial 401(k) over a working career is not that hard to do given time. Growth is greatly accelerated with an employer match.
If you are fortunate enough to have a 401(k) plan, make sure you maximize your match and contribute steadily. Based on long-term historical results, saving a small percent each payroll period now will pay off in the long run. Who knows, you could become a 401(k) millionaire.
While you have the most potential if you start at an early age, an employee of any age can benefit from understanding that the 401(k) offers benefits savers cannot achieve on
their own due to three 401(k) accelerators: 1) pretax advantages, 2) employer contributions and 3) tax-deferred growth.
Sponsors of 401(k)s who want to celebrate Retirement Security Week may
want to encourage employees to apply for the second annual 401(k) Champion Award that I sponsor at www.juliejason.com/award. Last year’s winners are highlighted at https://juliejason.com/award/2019-401k-champions. The award shines a light on participants who understand, appreciate and optimize their 401(k)
plans. For more information about National Retirement Security Week, go to https://www.icmarc.org/retirementweek.html.