So you just got your first job and you think retirement is a long time from now. But saving money towards retirement today means you will put in less than if you wait to start your retirement fund. What?
The chart and explanation below explain how this works.
Annual Savings Rate
Required by middle-income family replacing 70% of pre-retirement income
At age: % of income to save if starting at age:
age 25 age 35 age 45
62 15% 24% 44%
65 10% 15% 27%
67 7% 12% 20%
70 4% 6% 10%
Source: Boston College Center for Retirement Research
A recent study from Boston College Center for Retirement Research found that 50% of working families won’t have a big enough nest egg to maintain their standard of living in retirement. Two reasons behind the lack of nest egg are low saving rates and lower stock market returns.
Consider a middle income person who wants to retire at age 65. As the chart shows, he needs to save 15% of his preretirement income annually, starting at age 35. Note: that pace of savings assumes that the retirement account earns 4% a year more than inflation.
There are huge benefits by starting the saving and investing earlier as well as big benefit in delaying retirement:
- If that middle income person starts at age 25 instead of 10 years later, he can reach his nest egg target size by saving just 10% a year.
- But someone who does not start until age 45 must sock away a daunting 27% of income to retire at 65 or 20% to stop at age 67.
The data view someone who is 54 to 56 years old to be middle income if he earns $45,500 to $97,500. At ages 30 to 32, that range is $36,500 to $68,500.
By delaying retirement, you give yourself longer to contribute and can put in a smaller amount. To illustrate, let’s return to that middle income person who starts saving at age 35 and needs to save 15% annually if he retires at age 65. Delaying retirement will help. If he wait until 67 to retire, he will need to save 12% a year, according to the Boston College study. If he keeps working until age 70, a 6% yearly savings rate will get the job done.
Iowa State University Extension and Outreach has updated Retirement publications. Retirement: Secure Your Future materials are available at www.extension.iastate.edu/humansciences/retirement.
Happy Saving – Susan