Financial Planning, Retirement

An Early Start Can Improve Retirement Readiness

2/14/19 12:00 PM

iStock-626627280.jpgThe biggest money-related fear for Americans is “never being able to retire,” according to an earlier GoBankingRates survey. That is not too surprising since many respondents reported that they are already struggling to manage their near-term financial challenges. One in five surveyed adults, for instance, said that they are afraid they will always have to live paycheck to paycheck, and 18 percent said that they are worried about being in debt forever.

Such money troubles can often seem insurmountable, but wage growth appears to finally be picking up. This earnings boost will enable more Americans to shore up their balance sheets and start making real preparations for retirement. A natural concern for some people, though, is that it will take so long for them to personally benefit from these economic improvements that there will not be enough time left for them to accumulate an adequate retirement nest egg. However, it may be surprising just how much wealth can be generated in a relatively short period of time. For example, individuals aged 50 or older can contribute $25,000 a year to a tax-advantaged 401(k) retirement plan, i.e. the standard $19,000 limit plus another $6,000 in “catch-up contributions.”

A person with no savings at age 50 who begins contributing the full $25,000 each year can amass nearly $400,000 by age 60 and over $1 million by age 70, assuming an average annual return of about 8 percent. Of course, saving $25,000 a year may seem a bit daunting for many individuals but even setting aside just $1,000 a month in a 401(k) can generate more than half a million dollars over a 20-year time horizon, and simply maxing out an IRA ($7,000 per annum) can help a 50-year-old accumulate around $300,000 by age 70. Perhaps the biggest takeaway for younger Americans should be that these estimated retirement nest eggs can be achieved or even exceeded with more conservative savings rates if they start setting money aside at a much earlier age.

Moreover, those able to begin saving for retirement when they are still young can benefit from a significantly longer investment horizon that provides greater compound growth potential and additional time to recover from normal market volatility. Other opportunities that should always be taken advantage of include contributing enough to your workplace-provided retirement plan to receive the full employer match and utilizing any other savings tools at your disposal. For the latter, a new Fidelity Investments study found that people who regularly contribute funds to both a 401(k) and an IRA on average have balances that are nearly three times higher than those saving in just a single vehicle.



Sources: GoBankingRates, The Motley Fool, Fidelity Investments

Post author: Charles Couch