Start Saving in Your 20s and Retire a Millionaire

The average family only saves a little more than a $100,000 or so by the decade leading up to their retirement.

When you associate that number with the fact that 50% of all individual Americans age 65 and older have annual incomes in the range of $24,000 – far less than what most need to meet living and healthcare expenses – it’s reason to wonder how they plan to financially navigate the 10-20 years many will spend in retirement.

A Gentle Reminder

In last week's blog - "Excuses for Not Saving in Your 50s" - I mentioned various options that delinquent non-savers might pursue to bridge the gap between a “no worries” and a “high stress” retirement resulting from a lifetime of deficient personal financial management. Today, I want to remind my readers, particularly the young ones, that there’s a better way. One that, in conjunction with an increasingly unstable Social Security program, should provide a more secure retirement (85% of Americans 65 and older draw Social Security that ultimately will require some political attention to ensure its long term availability).

Start Saving Now

The key to a secure retirement is not rocket science. You need a plan. And it’s never too late to develop a plan but right now is best. I’m talking in your 20s; certainly no later than your 30s. And build that plan around a simple set of principles – the PDQ Principles come to mind…Patience, Diversification and Quality. But first you must save. Once you develop the habit of saving on a routine and consistent basis, then you apply these principles.

As I’ve stated ad nauseum, keep it simple. Build your portfolio around a low-cost index fund (S&P 500, Total Stock Market, etc.). Such a fund automatically provides you with diversification and quality, and a steady and routine savings habit necessarily embodies patience. And remember, you need to employ all three principles together. Now, let’s provide a simple example that demonstrates both The Amazing Power of Compounding and the importance of Daring to be Average (an index fund, in essence, yields the market rate of return…no more, no less) .

Another Boring Example

Let’s assume that you’re a 25-year-old high school or college graduate that earns $50,000 per year; that you save 10% of your after tax salary – about $400/month; that you create a Roth IRA and invest in a Total Stock Market Index Fund; and that the fund earns 7% per year, compounded quarterly for 40 years. Using a Bankrate calculator, upon retirement at age 65, your Roth would be worth $1 million before inflation. To demonstrate the amazing power of compounding, using the foregoing numbers, had you deposited the money in a bank account earning a fraction of 1 percent, you would have ended up with less than $200,000.

The Point Of This Exercise

Everything discussed in this blog is “old hat”. We’ve been down this road before. My point is simply this. Based on statistics year-in, year-out, folks keep arriving at retirement’s doorstep financially ill-prepared for 10-20 years of retirement living. There’s a better way.

My example is strictly hypothetical, but it’s a gentle reminder that, while young, with a bit of prior planning and by developing a few good habits (no, not those million-dollar spending habits), an individual can enter a “stress-reduced” retirement phase of life simply because of good financial planning.

Try it. You might like it.