If you are like I was when I first started saving for retirement, I’d look at the piddly amount I’d saved so far and think, “How am I ever going to amass $1,000,000 or whatever they recommend you have to retire?”
I wanted to explain to you, just as I explained to my younger self, just how I could do it.
First, this math is made on a few standard assumptions:
- The stock market can be counted upon to grow your money at least an average of 8% a year.
- By the rule of 72, it will take 9 years to double your money at 8% a year.
- You can save the maximum amount allowed per year in your IRAs, which currently is $6000.
Do you have $6000 a year you can put aside? After you see what I’m going to show you, you might want to! Otherwise, you can still make progress toward retirement with a smaller amount, so just stay with me.
For the sake of example, let’s say you start saving when you are 30 years old and you will retire at age 66.
You are 30 years old and you just put $6,000 away in an IRA. Your money doubles in 9 years (see assumptions above), so at 39 you will have $12,000, at 48 you will have $24,000, at 57 you will have $48,000 and at 66 you will have $96,000.
Do you think you could live on $96,000 a year in 46 years? Does that seem like a lot? Maybe you don’t need to save as much as $6,000 a year. Does it seem like too little? You can also save in a 401(k) too. And, you might just maybe get social security, or you might own real estate you can sell to supplement that. Maybe your retirement account will grow at greater than 8%. And actually this number doesn’t really matter because your money will continue to grow when you are retired, albiet at a low rate if you shift to more conservative investments for income. More on that below*
Now what if you started saving at 21 instead of 30? You would get one more round of doubling, so you could have $192,000 a year to live on instead. Pretty sweet.
The way I think about it is that every year I can max out my retirement contribution is one more year that I can live in retirement. The typical person may start saving at 30, retire at 65, and if they have saved all 35 years in between, they can having their annual living expenses until they reach 100 years of age.
*Let’s say you start saving $6,000 at age 30 and retire at 66, after 36 years of saving. Each year of saving is worth roughly $96,000, and 36 x $96,000 is $3,456,000. If you follow the recommendation to take out 4% a year from your overall retirement savings, you could take out $138,240 per year. I think I could live on that, how about you?
So again this is just how I think about it in a way that makes sense to me.