The best age to begin saving for retirement will be different for each person. Some are in a position to do it earlier in life, while others are unable to start until years later. You will be better off if you can start as early in life as possible, but that doesn’t mean that delaying contributions will prevent you from having a comfortable level of retirement savings.
Let’s take a look at the pluses and minuses of beginning retirement savings at various benchmark ages.
Right Out Of school
This is the time in life that most financial planners would say that you should begin saving for your retirement. And in a perfect world, this is when everyone would start saving for retirement. Alas, this is not a perfect world, and whether or not you actually begin saving at this point will depend on where you are in life.
Plusses: There’s no doubt that the earlier you start the more successful your retirement savings will be. For example, if you are right out of school (age 22), earning $30,000 per year on your first job, you contribute 10% of your pay – or $3,000 per year – into your retirement plan, and assuming a 3% annual increase in pay for your lifetime and 8% annual rate of return on investment, by the time you’re 65 years old you will have nearly $1.5 million saved.
In addition, you’ll be getting into a good savings habit early and putting away enough money that if you do have to take a break from retirement savings at some point in the future your retirement will still be covered.
Minuses: As good as that all sounds, beginning your retirement savings right out of high school or college won’t work for a lot of people. For one thing you probably have some debts that needs to be paid and they’re cutting deep into your cash flow.
For another, there are probably a lot of things you need to buy to get started in life, in addition to the need to build up some non-retirement savings at least for emergencies. And sometimes when you’re just starting out in a career field you don’t have the kind of job stability that easily tolerates long-term savings plans. Also, at this very early stage in life, many people just aren’t thinking too much about retirement!
This is the age where you really need to start thinking about getting into a retirement plan. You may have missed a few years of contributions that would’ve helped in the long run, but it’s still not nearly too late.
Plusses: At this point life, you’re still not completely comfortable with your position in life but you’re definitely out of the starting gate. You’ve probably pay off some debt, put away some money for emergencies and you’re probably making more money than you did right out of school.
Again let’s assume that you will earn an average of 8% on your money, your income will grow at a rate of 3% per year during your career and you’ll begin putting away 10% of your income each year for the next 40 years. The only difference is that you’re now making $40,000 per year. By the time you turn 65 you will have accumulated more than $1.5 million. The delayed start has caused you to lose nothing up to this point.
Minuses: If you came out of school with larger than average student loan debts you’re probably still paying them off and not a position to make substantial contributions to your retirement plan. This is also a time in life for some when marriage, children and buying a home enter the picture. All can compete with retirement when it comes to divvying up your paycheck
For many people this is the best time to begin saving for retirement.
Plusses: For many people, this is the age at which life begins to settle down into long-term patterns. This is especially true if you married and had children and bought your first home when you were in your 20s. You’ve already absorbed the cost shock of those additions to your life and you’ve gained some control over your budget.
Let’s take the same retirement savings assumptions that we used the two previous examples, but now you’re earning $60,000 per year. If you save 10% of your annual pay, by the time you’re 65 you will have nearly $1.5 million in your retirement plan. Because of the higher income that you’re earning at this age, the delay in retirement savings still hasn’t hurt you.
Minuses: By the time you’re 30 it may be difficult to establish the savings habit now that you’re spending patterns are largely set. This will be especially true if you have a family and own your home. Though you’re making more money than you were earlier in your life, your expenses have risen in step.
Many people are financially well established at age 35 making it the ideal age to begin saving for retirement.
Plusses: Your biggest advantage here is that you’ve entered the peak earning years of your life. Using the assumptions that we used in the previous examples except that now your making $75,000 per year, if you contribute 10% of your pay annually you’ll have more than $1.8 million by the time you reach 65. Clearly the delay has not hurt you up to this point.
Minuses: It’s ironic that it’s when you enter your peak earning years that you also become vulnerable to job losses. The retirement savings amount we determined above is entirely dependent upon your maintaining that income level (and progressively better) for the next 30 years. If that doesn’t happen, you’ll have less saved than what we’re projecting, only you won’t have the large established balance that you would have had if you would started your retirement contributions earlier in life. Final analysis: you can still do it, but there’s less room for error as you get older.
What if you’re 40 years old or older and haven’t done anything about retirement savings thus far? Does that mean that there’s no hope for you? Not at all!
You’ll probably need to lower your expectations. You may not have as comfortable a retirement as you might want, but the situation is far from hopeless.
Let’s say you’re 50 years old, you’re earning $50,000 per year, and you decide to save 15% of your income each year, and delay your retirement to age 70. By the time you reach that age you will have nearly $450,000 saved. That, plus Social Security income, and some income from a part-time job or business venture can provide a very comfortable semi-retirement.
Not the retirement you may have envisioned, but far from a bad outcome nonetheless.
What do you think is the perfect age to begin saving for retirement?