When should I start saving for retirement?

If you are alive and have an income the answer is now (or in some cases twenty-years ago). 

I have talked with some young people in their twenties who told me it was too soon for them to think about retirement. Talk to me when I turn forty one said.  

That’s a big mistake, very big. 

As simple as the concept is, all too many people don’t get the incredible value of compounding interest. 

For example, let’s say you start saving $100 a month at age 20 and over time average a 7% annual return. At age 65 you will have $381,572 of which $54,100 is the money you saved and $327,472 is interest. 

Now, if you wait until age 40 to start saving, you must save $470 a month to get the same total dollars at age 65.  

However, there are two key things to consider. First, at age 40 will you be in a position to save that much more? Chances are you are starting to think about college costs about then. You likely have a hefty mortgage, perhaps even seeking to buy a new home. 

Even more important is that you now have only twenty-years until retirement. That means your ability to cope and recover from stock market and economy ups and downs is far less than it was twenty- years earlier when you had a forty-five year horizon. 

As you get closer to retirement and hence start to live off your savings, your investments should become a bit more conservative than when you had many years to save. That typically means the rate at which your money grows will be less because you are also now concerned about preservation of your money. 

If circumstances require you to stop or cut back saving in your forties or fifties, think how much better off you will be if you had that nest egg started at age twenty still working for you.  Using the same assumptions as in the above examples, if you stopped saving at age 45, you would have $81,580 still working for you. Twenty-years later you would have $329,480. Even if you assume only a 6% annual return in your later years before retirement, you would still have $270,046. 


  1. Wrong answer. Studies show more than 2/3rds of wage earners live “paycheck to paycheck” – that it would be somewhat or very difficult to even have a one week DELAY in regular pay. See question #6: http://www.nationalpayrollweek.com/documents/2014GettingPaidInAmericaSurveyResults_FINAL_000.pdf

    It is no wonder that people are hesitant to earmark money for a retirement that would be 20, 30, 40 or more years away.

    However, early savings leverages the power of compounding and is essential to retirement preparation. What’s a person to do?

    The answer may be simple where you have access to a 401(k) or comparable plan at work – I call it The 401(k) As A Lifetime Financial Instrument. Basically, people should save more than they believe they can afford to earmark for retirement. The plan should offer them access via loans (not hardship withdrawals). I call it the “Bank of Dick”. Dick saves, gets the company match, invests, accumulates, when a short term need arises, he borrows from his own bank (in lieu of borrowing from a commercial source) and agrees to repay the money to his own bank, rebuilding the account for a future, larger need. Repeat as necessary until and even through the date the individual stops working.

    More and more employer-sponsored plans have or will soon adopt 21st century banking capability (we call it electronic banking outside the 401(k)) – facilitating adoption and success with this concept.

    If you don’t currently work for an employer who sponsors such a plan, save in an IRA, and encourage the employer to adopt such a plan, or consider that need when changing employers in the future.


    1. Living paycheck to paycheck is relative to how you spend your money. Anyone could do that because that spending includes other than necessities. Certainly the very poor can’t save, but they never could. They are the minority. Far more people can adjust their lifestyle and find something to save. They find money to spend on other nice to have stuff. Money in the bank is nice to have as well. I visit Starbucks most mornings to read the paper. Looking at what people spend each day there, I could find them $100 month to save with no trouble and most of those I see are well under age 40. It’s all relative.


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