Imagine you are a 27-year-old person not saving for retirement. You have a nice job paying $40,000 per year. The employer 401(k) plan offers a matching contribution of 50 percent up to 6 percent of your salary. Since you’ve never saved before, your portfolio is starting out at $0. How can you possibly retire rich? It’s surprisingly simple and easy.
All that’s needed is to start saving 1 percent of your salary right now. Then each year, increase your savings rate by 1 percent. So in the second year you save 2 percent of your salary, the third year you save 3 percent, etc. Do this until you are saving 15 percent of your salary in the 15th year. Once you hit the 15 percent savings rate, maintain it until retirement at 67-years-old.
That’s all you need to do. Assuming you get a 3 percent raise each year and earn 5 percent per year on your savings, you will have a retirement nest egg of $1,158,000! That’s a whole bunch of money for a fun, stress-free retirement.
Many 401(k) plans offer an automatic increase option. Sign up for it. Each year, your savings contribution automatically goes up 1 percent. You’ll never have to think about it again with this auto-increase option.
There are many reasons people aren’t saving for retirement. It’s so far away that saving isn’t a priority for most. However, please don’t think this way. The earlier savings begin, the more years of compounding investment returns. This is an opportunity you’ll never make up for with increased savings later on in your career.
Another common reason for not saving is monthly cash flow. You may think you can’t afford to save now. Paying the bills is tough enough. However, just saving 1 percent of a $40,000 salary is only $400 per year. That’s $15 a paycheck if you get paid every two weeks. And that $15 per paycheck is tax-deferred so it really only decreases take home pay by less than $10 per paycheck. Everyone can find a way to cut back on $10 every two weeks in order to save for something as important as retirement.
For those that don’t have a 401(k) at work, you can still save for retirement. Open a Roth IRA at any discount brokerage like Vanguard, Schwab, E-trade, or TD Ameritrade. Contribute 1 percent of your pay up to $5,500 per year.
This is a short article for a reason. The message is that saving for retirement is easy. Just start slowly with 1 percent and increase by 1 percent every year. That’s how you can retire rich!
Steve Doster is a certified financial planner™ professional providing commission-free financial advice for do-it-yourself investors. You can reach Steve at Doster Financial Planning by phone 619-688-1192 or email steve@dosterfinancialplanning.com. You can also follow Steve on Facebook, Linkedin, Twitter, or blog to get more personal finance advice and tips.
