The young and the foolish

Stop-watchLifehacker’s post today “How Much You Should Save for Retirement, Based on 139 Years of Data” is a nice summary of Professor Wade Pfau’s research on “safe savings rates.” But some of the comments made me groan.

The reasons people gave for not saving for retirement aren’t unusual: some can’t imagine ever getting old (you will) and some think there are more important things to do than save for retirement (there aren’t). The most frustrating come from people who are obviously young and thus obviously wasting their most precious asset—time.

Just look at the chart provided with the post. The longer you wait to save for retirement, the more you have to put aside to “catch up”—until catching up becomes all but impossible. Someone aiming for a replacement rate of 70% of her final salary needs to save about 12% of her income if she starts in her 20s (with 40 years until retirement). If she waits until her 40s, with 20 years left, she has to save half of her income. Half. How many 40-somethings will manage that? Sure, you may have student loan debt now, and you want to save for a down payment, and maybe get a better car, but trust me—it won’t be any easier to save down the road when you have even more obligations than you do now.

In the meantime, you will have wasted all those opportunities to get tax breaks and tax-deferred gains. You’ll have given up company matches you can’t get back. Most important, though, you’ll have blown the opportunity to let compounding–that miracle of math–work for you. Your money can’t earn returns that will earn returns that will earn returns if you don’t get it into your retirement accounts in the first place. The earlier you get it in there, the longer it has to work for you, and the more money you’ll ultimately have.

So sign up for that 401(k) or IRA. Set up automatic transfers now, and boost your contributions regularly. Do it before you do anything else, including paying down debt or working on your emergency fund. Let time be on your side, because it won’t be for long.

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  1. I’d love to hear more about what is reasonable now that I am 46, and just now able to start putting by a measly amount. It. Just. Wasn’t. Possible. before this. I know these articles are trying to accomplish something good for the younger folks, but for me, it makes me want to give up. ‘Cause I sure as heck don’t have the ability to put in 50% now! So, in the real world of children needing to be fed and necessary old cars to be kept on the road – and zip for employer match……what IS possible? Most of my co-workers (in early education) can’t even swing my measly amount.

    • lizweston says:

      I’ve got an upcoming MSN column that will discuss what you can do to salvage your retirement if you got a late start. The bottom line is to put aside as much as you can, work as long as you can and adjust your expectations about what retirement will look like. You can have a good retirement on less money, but it won’t be one filled with luxuries.