Home » Savings » The Cost of Not Saving for Retirement

The Cost of Not Saving for Retirement

Happy Monday!  I hope everyone had a great weekend and are ready for the new week.  Today I would like for you to welcome Julie who is now on a one of the writers here at Your Daily Finance.  I figured the best day to introduce her would be at the beginning of the week so that everyone could get a chance to read one of her post.

This week we will actually be posting 3 times.  Today from Julie, Wednesday I will post and Friday we have a guest post by Jim Wang.  I hope everyone really enjoys the post today and please welcome Julie to the team.  Take it away Julie!!

Are Your Saving for Retirement? Retirement by the Numbers

Sometimes numbers tell such a powerful story that we almost don’t need words.  In this post I’m going to walk through some stories about retirement savings, using numbers.

Standard wisdom is that you need 70% of your pre-retirement salary to live comfortably in retirement, if you don’t have to pay a mortgage or other major expenses.

30 Years Old and No Mortgage

Let’s consider someone who is 30 years old, living on $50,000 a year having paid off her mortgage. At a minimum, she needs $35,000 a year during retirement, in today’s dollars. If she retires at 65 and lives to be 85, she’ll need at least $700,000 for retirement, again in today’s dollars.

Empty 401k

Numbers like this make it clear: when we don’t have retirement savings that is yielding enough to stay ahead of inflation, there is going to be a very big shortfall between short-term savings and social security (assuming it’s still around then), and what we actually need.

I can’t even imagine what it would be like to exhaust my retirement savings a few years into my retirement. But hiccups like a big illness or being forced into retirement a few years early are not that uncommon for people in their 60s, unfortunately.

Of course, when you’re young, it’s easy to justify putting off retirement planning, because it feels like you have so much time ahead of you. But the longer you wait, the fewer years your money has to pay returns. The difference adds us surprisingly quickly.

Saving Early Vs Savings Later By the Numbers

Let’s look at some more numbers. This example from CNN Money outlines how, if two people both save $3,000 a year for 10 years, but one starts saving at 25 and one starts saving at 35, the one who saved from age 25 to 35 will have over $100,000 more when she is 65 than the one who saved from age 35-45 will have at the same age.

And, CNN Money calculated that the person who saved just $3,000 a year from age 25 to 35 would have $472,000 by age 65, with a standard rate of return. Not bad!

The nice thing is that saving a small amount like $3,000 a year, pre-tax, only makes a small dent in your take-home income. If you make $50,000 a year and save $3,000 per year pre-tax (that’s 6% of your salary), you will see a reduction of about $100 per paycheck in take-home pay.

How Much Can You Afford NOT to Save

Every year, I use a calculator like this one to decide how much I can afford to save and how it will affect my pay. I started at what I could afford at the time, and am working my way up to the maximum allowable (the government puts a cap on some pre-tax saving).

Again, I can’t stress enough how easy it is to put retirement savings on the back burner when we’re relatively young. Paying off student loans or other debts, buying a house, and all our other financial hopes and dreams can seem more immediately important.

But when you consider how much you earn on early retirement savings, because of how much the interest compounds over the years, it is clear that setting aside even a little bit of cash early on will pay off in the end.

When did you start saving for retirement?  Do you wish you would have started a little earlier?  What advice would you give to someone who is currently not saving at all or very little?