When thinking about retirement savings, two key words are early and enough. Unfortunately, very few of us begin saving early, and very few of us save enough. In a May USAA article , Scott Halliwell brings up several important ideas regarding retirement savings:
If you’re falling short of a savings goal — particularly retirement savings — there are solutions available, Halliwell says, and only one has anything to do with your portfolio:
Save longer. “In other words, give yourself more time,” he says. Work longer and retire later.
Reduce the amount. Lower your retirement expectations.
Save more. Spend less now and put more away for retirement.
Consider your risk tolerance. If you take more risk, do so when you are early enough in your career to recover if you experience losses.
That sounds pretty simple, but sometimes it is overwhelming. If you are older and have less time to save for retirement, you need different strategies to ensure that you meet your goals. Also from the same USAA article,
How can you make up for lost time?
“One of USAA’s core beliefs is that members should save now for retirement, and save more,” says Zachary Gipson, USAA’s vice president of retirement and wealth planning.
If you’re young and have time on your side, compounding can be an asset for your investment strategy. Consider this hypothetical example, using a simple compounding calculator, which shows how saving more can trump higher rates of return in the short-term:
Steve and Jessica are 25. During the next 10 years, Steve plans to invest $200 a month, hoping to earn an 8% average annual return. Jessica plans to invest $400 a month and hopes to earn a 3% average annual return.
Look what happens to this hypothetical investment after 10 years: Steve’s investment would have a total value of $37,549, while Jessica’s would have a total value of $56,677.
What if you are not as young as Steve and Jessica? One way to make up for lost time is to take advantage of catch-up savings opportunities in 401(k) plans. According to the Internal Revenue Service, if you turn 50 in 2013 and participate in a 401(k) plan that permits “catch-up contributions,” you can contribute an extra $5,500 a year on top of the $17,500 limit on elective deferrals. What’s more, those who are eligible to participate in IRA plans may contribute an additional $1,000 to a traditional or Roth IRA.
Those of us who are young or middle-aged need to save in a different way than older generations have saved. We can’t count on spectacular market returns to create substantial savings from small contributions. Starting early and saving enough are essential to reaching our retirement goals.