Financial Planning, Retirement

Retirement Savers: Don’t Be Discouraged By A Late Start

7/22/20 12:00 PM

Thirty percent of working Americans said that it is “very or somewhat likely” they will delay the age at which they retire as a result of the recent economic downturn, according to a new Wells Fargo poll. In May we learned that this can actually be a good strategy during any economic backdrop because even just a brief postponement of retirement can result in a significant boost in your rewarded Social Security benefit. However, continuing to work later in life is not always an option, and there are numerous reasons to avoid relying heavily on the government for your old-age income needs. A great way to hedge against these potential longevity risks is to save and invest as much money as possible for retirement.

The earlier one can start the better, but for those not able to begin until later in life do not get overly discouraged because it may be surprising just how much of a retirement nest egg can be generated in a relatively short period of time. For example, individuals aged 50 or older can contribute $26,000 a year to a tax-advantaged 401(k) retirement plan, i.e. the standard $19,500 limit plus another $6,500 in “catch-up contributions.” A person with no savings at age 50 who begins contributing the full $26,000 each year can amass roughly $400,000 by age 60 and well over $1 million by age 70, assuming an average annual return of about 8 percent. Of course saving $26,000 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 over $300,000 by age 70.

Perhaps the biggest takeaway for younger Americans should be that such 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, quarterly Fidelity Investments data has repeatedly shown that people who regularly contribute funds to both a 401(k) and an IRA on average have balances that are significantly higher than those saving with just a single vehicle.



Sources: Wells Fargo, U.S. IRS, Fidelity Investments

Post author: Charles Couch