Waiting to Save for Retirement Could Cost You

February 22, 2024 Beginner
The sooner you start saving, the more likely you're likely to reach your retirement goals. Here are some numbers to put things in perspective.

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 their Roth IRA to $500,000 at the time of retirement, though they're starting to save for retirement at different ages. All plan to retire at age 65, and the investors make the maximum allowed contribution each year.

Kate is 28 and Derek is 35. Both make $7,000 annual contributions to their IRAs. Jane is 50 and contributes a total of $8,000, which includes a $1,000 catch-up contribution.

*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

At the retirement age of 65, Kate's savings have reached $1 million and $500,000 over the $500,000 retirement goal, Derek's are $655,000 and $155,000 over, but Jane's are $284,000, which is $216,000 under the goal.

The example is hypothetical and provided for illustrative purposes only. It is not intended to represent a specific investment product. Dividends and interest are assumed to have been reinvested, and the example does not reflect the effects of taxes or fees. Assumes annual contribution of $7,000 until age 50, and $8,000 from age 50 to age 65; also assumes 6% average annual portfolio growth. Values are rounded.

How you can best prepare for the future

Here's a retirement savings rule to get you started.

A retirement savings goal is to save a total of 25X the desired annual income from the portfolio. For example, if the goal is $50,000 of annual income from a portfolio, the target savings would be $50,000 x 25 or $1.25 million.

If you start saving in your 20s, contributing 10% to 15% of your paycheck (including any savings match from your employer), you'll likely meet your retirement savings goal. With every decade you delay, however, you'll need to save a larger percentage of your paycheck.

A person in their 20s would likely reach their retirement goals by saving 10% to 15% of their paycheck. The number increases to 15% to 20% for someone in their 30s, 20% to 30% for someone 40 to 44 years old, and 30% for those 45 or older.

Find additional ways to save

Here are some options for getting on the right track:

  • Maximize your workplace retirement plan. For 2024, the maximum 401(k) contribution for employees under age 50 is $23,000, up from $22,500 in 2023. Employees age 50 or older can make an additional catch-up contribution of $7,500. 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% to 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. If you don't use the money, you won't lose it. An HSA stays with you. (Note: You may only open and contribute to an HSA if you're covered by a high-deductible health plan. Contribution limits for 2024 are up to $4,150 for single coverage and $8,300 for family. At age 55, individuals can contribute an additional $1,000. See HealthCare.gov for details).

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.

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The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Investing involves risks including possible loss of principal.

This information is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, Charles Schwab & Co., Inc. ("Schwab") recommends consultation with a qualified tax advisor, CPA, financial planner, or investment manager.

Diversification and rebalancing strategies do not ensure a profit and do not protect against losses in declining markets.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

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