Waiting to Save for Retirement Could Cost You

September 3, 2021
When it comes to saving for retirement, the clock is ticking.

When it comes to saving for retirement, the clock is ticking. To illustrate the value of time, let’s consider three Roth IRA investors.

Kate, Derek, and Jane all decide to open Roth IRAs to supplement their other retirement accounts. Each investor hopes to build this account to $500,000 at the time of retirement, though they are starting to save for retirement at different ages. All plan to retire at age 65, and the investors maximize their contributions each year.  

Image showing a 28-year-old who contributes $6,000 per year, a 35-year-old who contributes $6,000 per year, and a 50-year-old who contributes $7,000 per year

*People age 50 and older are allowed to include a $1,000 “catch-up” contribution.

By age 65, here’s how their savings could add up

Image showing the value of contributors' Roth IRAs at age 65. At age 65, the investor who started saving $6,000 per year at age 28 now has $890,000. At age 65, the investor who started saving $6,000 per year at age 35 now has $565,000. At age 65, the investor who started saving $7,000 per year at age 50 only has $189,100.

The example is hypothetical and provided for illustrative purposes only. It is not intended to represent a specific investment product. Assumes annual contribution of $6,000 until age 50, and $7,000 from age 50 to age 65; also assumes 6% average annual portfolio growth.

How you can best prepare for the future

Here’s a retirement savings rule of thumb that you can use as a directional guideline to get you started. 

A good rule of thumb for a retirement savings goal is 25 times the income you'll need in your first year of retirement. For example, if you'll need $50,000 in your first year of retirement, your goal may be to save $1,250,000 for retirement.

If you start saving in your 20s, contributing 10%–15% of your paycheck including a savings match—if any—from an employer will likely allow you to meet your retirement savings goal. With every decade you delay, however, you’ll need to save a greater percentage of your paycheck.

To reach one's retirement goals, an investor in their 20s may need to save 10-15% of their paycheck. An investor in their 30s may need to save 15-25% of their paycheck. An investor ages 40-44 may need to save 25-35% of their paycheck. Investors 45 and older may need to save 35% or more of their paycheck.

Find additional ways to save

Here are some options for getting on the right track:

  • Maximize your workplace retirement plan. For 2021, the max 401(k) contribution for employees under age 50 is $19,500. Employees age 50 or over can make an additional catch-up contribution of $6,500. Be sure to take advantage of any match your company offers. 
  • Devote funds from a windfall, such as a bonus or inheritance, to an investment account geared toward your retirement.
  • Set up a taxable brokerage account to supplement your retirement savings.
  • Give your savings a boost. As your income increases, up your savings rate by 1%–3% each year. Before you know it, you’ll be savings a lot more than you thought you could.   
  • Start a Health Savings Account (HSA)—if you’re able—to help cover medical expenses, both now and later in life.1 If you don’t use the money, you won’t lose it. An HSA stays with you.  

Better late than never

Invest in your future sooner rather than later. If you’re starting later in life, don’t get discouraged—there are other options that could help you reach your financial goals. All it takes is discipline and perseverance.

1You may only open and contribute to an HSA if you’re covered by a high deductible health plan. Contribution limits for 2021 are up to $3,600 for single coverage and $7,200 for family. In 2022, limits will increase to $3,650 for self-coverage and $7,300 for family. See HealthCare.gov for details.

How much will you need to retire?

5-Step Tax-Smart Retirement Income Plan

Smart tax planning can help extend the life of your retirement savings and may lower taxes in retirement.

Roth 401(k) vs. Roth IRA

Three reasons to consider contributing to a Roth 401(k), if available.