The Average Retirement Saver Makes the $ 500,000 Mistake

A quote often attributed to Mark Twain is: “The two most important days in your life are the day you are born and the day you find out why.” But in the modern age, the day you start saving for your retirement could be a contender for the next spot on the list. Too many workers delay this day for too long, according to a recent study – and that’s a mistake that could end up costing them $ 500,000.

Q4 2020 retirement security survey sponsored by CFO and insurance company Main, finds that people start contributing to their workplace pension plans at the average age of 32. This is understandable for the saver who does not lock in a full time job until that age. But it’s a costly delay for those taking the more common path of settling into a full-time job in their mid-20s.

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If you’re starting to save in your twenties

Here are the numbers. The average annual salary for a worker aged 25 to 34 is $ 47,736, according to the United States Bureau of Labor Statistics. And the average contribution rate in 401 (k) plans is 12.9%, including employer matching, according to the Plan Sponsor Council of America. These figures correspond to pension contributions totaling approximately $ 6,150 per year. A 32-year-old who wishes to retire at 65 has 33 years of age to invest and increase their contributions. Assuming the retirement portfolio performs at the long-term market average of 7% after inflation, the retirement savings balance will be approximately $ 730,000.

This equates to $ 29,200 of annual retirement income, assuming this saver will withdraw 4% each year.

But what if a retiree started saving earlier, say at age 25? You might be shocked at the difference just seven years will make. Under the same assumptions, the retirement balance is nearly $ 500,000 more, or just under $ 1,228,000. This amount would support annual retirement withdrawals of $ 49,120, almost $ 20,000 more than the original scenario.

The takeaway should be clear: your 20s are when you can get the most out of your savings contributions. The money you set aside early in your career has four decades to grow – if you’re invested in the stock market, that’s enough time for every dollar you contribute to rise to $ 15 or $ 16. Twenty years later, you will only have time to grow every dollar to $ 3-4.

If you are already over 30

Let’s say your 20s passed you penniless hidden in a 401 (k). Now what? A comfortable retirement is always within your reach as long as you’re prepared to fund a bold contribution rate. If you start saving at age 32, for example, you will need to save about $ 10,000 per year to hit the $ 1,228,000 mark. At a salary of $ 48,000, this represents 21% of your salary, including your employer’s consideration. Wait until you are 42 and your total contribution rate should be 40%.

These numbers do not take annual salary increases or inflation into account, but these factors can often offset each other anyway. This is why it is dangerous to postpone saving until you earn more. Saving doesn’t get easier over time, even if your salary increases, as your living expenses are also likely to increase.

Start early to end strong

Another famous quote is: “The secret to moving forward is to start”. And that might be the best retirement savings tip there is. Start contributing to a regular retirement account today – a 401 (k) if you have one or an IRA. It’s a move that could ultimately add six digits to your retirement savings balance.