Save $50K by age 30: Why this crucial retirement milestone matters, and how to get there
Read my story at Grow
It's that time of year when I play the role of stick in the mud and tell college graduates and other young people that the 20s are by far the best time to save for old age. While groups like Key can give you help financially once you retire, it is down to you to set yourself up for a happy later life while you're in your 20s and 30s. So while young folks might be tempted to take that graduation gift from grandma and grandpa and pay down a student loan, or disappear to Europe, they really, really should put at least half of it in an IRA,
Why? Because that's the best route to becoming a millionaire. The road to $1 million begins with a nice family check and $150 a month saved in your 20s. Really, it does.
Behavioral psychology tells us that people tend to give up on long-term goals (suffer "goal release") when they can't see the finish line. I'm going to go ahead and guess that many people within the sound of my voice don't have $1 million and can't imagine getting a $1 million, but that's ok. Here's a more realistic goal:
Save than first $50,000.
Recently, I wrote about "hitting your splits" for Grow, Acorn's magazine website. Using a lot of assumptions combing the power of time and consistent (but modest) deposits, I show how someone in their 20s can turn $150 a month into $1 million by retirement. Planning for retirement is something everyone should be on top of; if you've not begun to do so, check out these top 9 retirement considerations.
It's overwhelming to think about 40-year time horizons, however, so separately, I want to get you to the first turn on the track of retirement savings -- the quarter-pole, sort of. Ideally, you'll reach $50k by age 30, which sets in motion the ability to double your money every 7 years, meaning you can reach $1 million in your early 60s. But if you are older than that, no worries. You just set the clock back a bit. Get $50k by age 40 and you're on the road to $1 million by your 70s. All the math and presumptions are in this story on Grow's website.
The entire point of this thought exercise is to get you started, however, and that means tackling the problem of piling up $50,000 somehow. How do you do that? In this companion story on Grow's site, I offer several difference scenarios. I'll include the simplest version here:
We’ll start slow, with a $50 weekly contribution—or maybe you put in $30, and your company kicks in $20, if you’re lucky. For now, we’ll still assume 7-percent returns. (That’s not a great assumption for a short timeframe, but it’s fair when you stick with it over the long haul.)
After three years, that gives you a rather humble-sounding $8,626. Right now, you’re probably thinking, “That sure doesn’t sound like $50,000. Heck, it doesn’t even sound like a new car.”
It seems so impossible, getting the first sizable-sounding pile of cash. And after three years in this model, that's understandable. A kitty of $8,000 after three years of devoted savings seems cruelly small. As in, "What's the point?" small. But it's right at this point that savers need to plow on. That's what successful people do. Things get better soon, the savings speed up, and the finish line comes into focus.
Be patient. Let’s say you get a better job and up your contributions to $65 each week, while your employer puts in $35, and you get those 7-percent returns. In seven years, you’d have around $35,000. Just two short years later, you’d have nearly $52,000.
Now, it sounds like you've gotten somewhere. Now, you are on your way.
Of course, if someone gives you $1,000, or $5,000, to get started, you are in much better shape. You'll have nearly the whole decade for that initial investment to work its compounding gain magic. With a $5,000 start, you'd reach $50,000 in just 7 years by investing just $200 a month and a $200-a-month employer match (assumptions assumed).
The key is making time work for you. And to do that, you have to be patient.
And, of course, you have to be lucky. You have to avoid a major health crisis. You have to enjoy at least reasonable employment. You need to avoid a family financial crisis. And you need to avoid losing all your disposable income to student loan payments. (Pay what you need to wipe out that loan in 10 years, but no more. The rest should be devoted to retirement whenever possible).
Very few Americans successfully manage this process. Here's some stark data I gleaned recently from a Society of Actuaries paper:
Only 6 percent of retirees and 5 percent of pre-retirees report having $1 million or more in savings and investment....At the low end of the spectrum, 25 percent of retirees and 21 percent of pre-retirees indicate they have less than $25,000 in savings and investments, while 15 percent of retirees and 8 percent of pre-retirees report income under $25,000.
In other words, Americans are FOUR TIMES MORE LIKELY to have less than $25,000 in savings at retirement than they are to have $1 million. In other, other words, about one quarter of Americans never even get close to $50,000.
On the other hand, Fidelity reports that the average 401(k) balance is now more than $90,000, and for employees who've been in the plan more than 10 years, it's $251,000. So folks out there are taking advantage of the power of time.
Put yourself on the path to be on the right side of these statistics.
Ultimately, whether you plan on retiring to a retirement facility such as lakeside village, or want to spend your later life in your family home, it's important that you plan for the financial aspects of your golden years.
By now you realize that the first $50,000 is a fairly arbitrary goal. It's meant to inspire you with the belief that, yes, saving a little today is worth a lot tomorrow. By one calculation, if you are young, every $1 saved today can be worth $16 at retirement. If you are young.
But if I can economize my message to you.
Start saving now. Today.
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