The Secret of Retirement Savings: You Can’t Make Up for Lost Time

Laura Shin

Let’s say you didn’t start saving for retirement then. What happens next? A year or two later, you’re due for a raise, and where does it go? To a nicer apartment, or a nicer car. The next raise goes toward your wedding or a down payment for a new house, and so on.

As you can see, it’s so easy to keep postponing saving for retirement. But what we’re about to show you next will blow your mind: Waiting to contribute when you make more money doesn’t make any financial sense.

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Why You Can’t Make Up for Lost Time

Let’s say you’re 25 and you want to have $1 million when you retire 40 years from now. If, over time, the market returns, on average, 7% a year, you’ll only need to save about $5,009 a year—$200,360 total—to get to your goal. You make $35,000 a year, so setting aside about $5,000 a year (more than $400 a month) sounds impossible, and you’re probably tempted to delay saving for retirement until you start making more money.

But think about this: Contributing $5,009 a year right now will leave you about $30,000 a year to live on. But if you wait until you’re 45 and making more money—let’s say, $60,000 a year—and start contributing then, you’ll have to contribute $24,393 a year to get to your retirement goal of $1 million! And that leaves you $35,607 a year to live on—at age 45.

But if you had started at 25, you would still be contributing just $5,009 a year at age 45, so you would have almost $55,000 a year to live on—not bad.

So now, when would you like to scrimp? When you’re young, all your friends are in the same boat and you have almost no responsibilities? Or when you’re 45, have two children and are dreaming of a beach house? (And if you’re already 45, then start now, rather than at 55!) 

Why Time Is So Crucial to Growing Your Retirement Savings

As you can see, starting early makes saving for retirement a lot easier. Why is that? Take Charles and Katie. Both of them put $24,000 into their retirement accounts over the years, but Charles began saving ($50 per month) at age 25, while Katie began saving ($100 per month) at age 45.

Even though they both put in the same total amount, Charles will have almost twice as much money at retirement as Katie will when they reach age 65. Why? His money had more time to grow, so it was able to accumulate much more than Katie’s money.

The reason time gives such a big boost is because of something called compounding. For instance, let’s say someone invests $2,000, and the investment grows 7% a year. After one year, they’ll earn $140. The next year, they’ll earn $149.80. The almost $10 extra comes from the fact that the $140 they earned the year before will itself also earn 7%.

RELATED: Compound Interest 101: How It Works

After 10 years, assuming that the investment grows at exactly the same rate every year (it doesn’t happen like that in real life, but usually does on average over time), that $2,000 will have grown to $3,934.30. In 20 years, it will be $7,739.37—not because any money has been added, but simply because the money has had more time to grow.

  • Guest

    Great advice! But now I’m super depressed. As a musician who has made a very, very modest living throughout my career, it has been impossible for me to save for retirement until this year (and I’m over 40!). I intend to keep working forever — but sometimes events in life can alter the best-laid plans. The meager amount I’m able to contribute to my retirement plan seems almost pointless, and I worry about my future.

    • Lisa

      You may feel overwhelmed, perhaps thinking, “That’s twenty years I could have been saving”–but instead of feeling that now it’s pointless and freezing up, think of how much more overwhelmed you’d be twenty years from NOW, if you were looking at FORTY years of no saving instead! Instead, you’re going to be relieved, happy. and proud you starting saving now.

      Like you, I’ve been living modestly, and if you are anything like me then every extra few dollars a month is a reason to celebrate–little things like the difference between pinching pennies at Christmas or feeling comfortable getting your loved ones a gift AND paying the bills. Future-You will be thankful for any amount you saved now, so that you wouldn’t always have to choose between those two things later. Hardly pointless! Every dollar you put into an IRA now is one future you will be grateful for. (And one that will start working and growing–even more to be thankful for!).

      No point regretting the past, as what’s done is done–what you CAN control, right now, is your future. :)

  • LV Guest

    Question, why do you say one should roll over $ from one’s old 401(k) (from a previous company) to the current one? My boyfriend started a new job 8 months ago and hasn’t rolled over his old 401(k). He said he has met the minimum requirement to keep his previous 401(k) open indefinitely. Is there any other reason why he should consolidate his two 401(k)’s?

    • Marie

      My understanding is that you would want to consolidate the accounts for ease of management. Many, many people leave jobs and forget about old retirement accounts, especially if there isn’t much money in them, and never use them.

    • spin

      In general you’re better NOT transferring it to your current company’s retirement account as company’s 401k investment choices are typically limited (though that’s changing). You’re usually better off creating a rollover IRA with the same investment company that handles your company’s 401k. Then when there’s four 401Ks you can merge them into one account (like Marie noted for easier management).

      You may be better off transferring it if you think you would need to take out a loan from your 401k. Companies that allow that have upper limits ($100,000) and shorter payback periods (5 years). That said I’m not sure if a company would allow you borrow money that wasn’t deposited through them.

    • LearnVestJacqui

      Hi there,

      I think this article can answer you question about whether or not a 401(k) rollover is necessary or preferable:

      Thank you!

  • HL

    I generally agree with the premise of this article, but people should realize that a 7% per year growth assumption is pretty aggressive and might not hold true each year. I started saving for retirement at my first job post-college, even though I couldn’t save much. When I left, my account was worth about $4300. I then spent three years in law school and didn’t have any extra money to add to my IRA. When I graduated, guess how much my IRA was worth — $4100. Not only did I “lose money” (it has since risen quite a bit, so nothing was REALLY lost) but I got absolutely NO benefit of compounding interest during those years. I could have kept the money in a savings account and then invested the lump sum later with no overall effect on my long-term balance. I certainly don’t regret scrimping to put the money aside early, and it is now behaving more like what is described in the article, but it kind of drives me crazy when “money experts” present growth predictions as solid fact when it is really utterly dependent on the state of the markets.

  • WakeUpPeople

    How can you tell people that they will only need to save around 5K for 40years in order to reach a million??

    Calculations I’ve done, that assume at least 4% returns from the market, have me putting in AT LEAST 12K a year. Do we really believe the market will be returning 7%-10%? I sure don’t.

    I am definitely scared for the future. No pensions. and at best slashed social security benefits.

  • Umi Wang

    Here’s the path to retire on your own terms, in 7 steps:

    1) Pay off your debts as fast as you possibly can. If this means living in a crappy studio apartment and eating ramen everyday for a couple of years, do it. If you want to buy a car, get a reliable beater. Get insurance for $25/month from Insurance Panda (4AutoInsuranceQuote is also good). Forget about buying a house until your debts are paid off.

    2) Once you are out of debt, stay out of debt. The only exception to this rule is a vehicle and a house. If you want to get a nicer car, buy used and be able to pay it off in a year or 2.

    3) If you are going to stay in the same spot for at least 10 years, buy a house, preferably with at least a little bit of usable land. An acre is good, 5 acres is better. Take the amount you are pre-approved for and cut it in half – that’s how much you should spend on a house. Come to the table with at least 20% down and make a couple of extra mortgage payments every year. If you’re going to be transferred or relocate every 5 years, forget about buying a house and rent instead.

    4) Develop multiple revenue streams. Do contract work. Start a business on the side. Invest in a business as a silent partner. Raise chickens, breed dogs or grow apples. Build websites. Buy and sell antiques. Acquire rental property. Sell something that generates residual income. Learn to play the currency markets or trade stocks. Do whatever you can to generate income from multiple sources.

    5) Grow these multiple revenue streams to the point that they generate enough consistent and reliable cash flow to replace your current income.

    6) Make as much as you can. Save as much as you can. Give away as much as you can.

    7) Retire!- the sooner, the better. Be sure you understand that “retirement” doesn’t necessarily mean you stop working, it just means having the freedom to do what you want to do, when you want to do it.

    Don’t be foolish and fall into the trap of trying to measure your wealth by the value of your assets. Markets change. Valuations fluctuate. Instead, measure your wealth by the amount of cash flow your assets consistently generate.

    • kr

      As a dog lover and advocate of rescue first and spay and neuter I can’t believe you would suggest “breeding” dogs for profit in this dog-is-an-accessory and mutts labeled “designer” (HELLO puppy MILLS) are dumped into shelters when the trends change and the dog stops being fun and cute. One can eat and sell the eggs then eat the chicken itself when it no longer produces.
      The rest of your comment is excellent otherwise.

  • Patrick

    It seems your article is based on the assumption you can’t really increase your returns beyond 7% and I tend to disagree with this assumption. I’ve been able to, with conservative trading, boost my returns into the double digits with options trading. It’s a wonderful way to not only control what you invest in, but better manage the risk you accept in the market as well. I would highly suggest anyone running into the “time crunch” problem look into learning options trading. It’s an awesome feeling to put a two-digit “annual return” number into the retirement calculator!

  • ChristaJocelyn

    Calculations I have done. I am definitely scared for the future. No pensions. and at best slashed social security benefits.