Dear Z, E, and T,
Whether you actually “retire” or continue working beyond “retirement age”, you need to save for older age. I highly recommend you continue working in some sense. In a career you love, volunteering, missions work, etc. You were created with purpose and to work, not to sit around and do nothing all day. There will come a point where you cannot make a sufficient income in your older age. So plan well and you will be ready when the time comes.
I promised to teach you what I know. To keep it simple. So there isn’t anything secret or magical right here either. There’s no “get rich quick” trick. This is the only guaranteed way I know to significantly increase your retirement account balance by retirement age (by 47.5% in my example).
1) Start saving as soon as possible! This is because of compound interest, you don’t have to understand it, but you need to utilize it! As the money you save earns interest, that interest goes into your account and earns more interest which earns more interest… so basically money you never put into your account is earning more money for you.
John saves $250/mo (which is $3,000/yr) for 20 years from age 22 to 42. Then stops.
Greg saves Zero from 22 to 32, then starts $250/mo ($3,000/yr) for 33 years (age 32 to 65).
John has put $60,000 into his retirement account by age 65 (actually he put it all in by 42).
Greg has put $99,000 into his retirement account by age 65.
Who has more when he retires? John or Greg?
It’s John. It makes no sense, except for compound interest; the value of letting money earn money over time. This money lesson is one that will serve you well in life in general too… real growth generally takes time. You can’t do it overnight.
Even though he saved much less than Greg saved, John has significantly more.
John’s balance = $461,271
Greg’s balance = $312,672
And if John continues to put $250/mo into savings from age 22 to 65 instead of stopping at age 42? He’ll have $610,088.
The best time to start saving is today. If you don’t listen to me and you think… “Wow, I’m 30 and didn’t do this and now there’s no point.” That’s a fallacy. Start now. Small amounts add up. Don’t think that you don’t have enough to save to make a difference. Don’t wait “until you get that raise” to start saving. Small, steady, consistent planting leads to significant growth.
Here are few more tips that go along with this:
2) Diversify. Simply put, don’t save everything all in one spot. So don’t put everything in one stock, or even one mutual fund. Save in multiple investments to help reduce the risk of losing your money. Also diversify beyond the stock market. Invest in real estate and other investments.
3) Reduce risk as you age. The stock market isn’t a guarantee. People are getting more nervous about it. However, I still believe over the long run, a well diversified investment portfolio will provide good returns. You can invest in stocks and riskier investments at a young age because you have time to wait. Ups and downs will happen, but you’re young and you’ll ride them out. As you age, start shifting to less volatile, less risky investments. If a stock market dip dramatically hurts you right before retirement, you have most likely failed to shift your investments appropriately as you’ve aged.
4) I’ve said it before and I will say it many more times. This is no secret. Lots of people know this. Many professors showed this example in my college classes. This is not some secret trick to having lots of money. Knowing this is nothing special… actually doing it is what makes the difference. Lots of people know it, but it is very difficult to be disciplined enough to actually do it. Be one of the few.
*I used this free calculator and a 6% return, which seems to be a conservative number as of today. FYI, when I was in college and professors used this example they used 10% or 12%!
*The amounts in the example are not likely enough to provide for your full financial needs at a retirement age of 65. They were simply used to show the significant impact of starting early.