Time, not money, is the most important factor when it comes to saving and investing for retirement. That’s due to compound interest, something Albert Einstein supposedly called “the eighth wonder of the world.”
Compound interest is the interest you earn on the money you save, plus the interest it's already accrued. Only specific investment types pay interest, but the principle of compounding also applies to investment returns. It's why investing experts suggest you start as soon as possible.
Try our compound interest calculator to see for yourself!
However, not all Americans have the income to consistently save and invest in their 20s or even their 30s. One in five Gen X Americans, who are between ages 41 and 56, want to boost their retirement savings, according to a survey by Bankrate.com.
The good news is, if you’re 40 and haven’t started investing or saving for retirement, you still have time to create a secure retired life for yourself, says Mark La Spisa, a certified financial planner and president of Vermillion Financial in Barrington, Illinois.
“Even if they start at 40, they will be fine for retirement,” he says. Here’s what he suggests you do.
Go through your cash flow and see where you can cut spending, La Spisa says. Do whatever it is you need to do to increase your retirement contributions to at least 10%. “Bottom line is we gotta get people to start saving between 10% and 20% of their income,” he says.
Remember, this money is not disappearing. It is going toward your future self. Think about how much money you need in order to sustain yourself now, and how much you expect to need when you’re older.
“If you can’t live on 90% of your income now, how are you going to live on 0% of your income later,” La Spisa.
If you’re having trouble reaching certain investing goals, make a concerted effort to work up to them, says Kevin Mahoney, CFP and founder of Illumint in Washington, D.C.
“Someone in their early to mid 40s still has a good amount of time until they reach retirement, in most cases,” he says. “So there is an opportunity to grow their investment percentage over time.”
Pinpoint how much you are contributing to your retirement now, and make a goal to increase that by one percentage point every year.
“For someone in their early 40s, fast forward 10 years, that’s at least an additional 10 percentage points they weren’t contributing before,” he says. “Making continual, incremental progress will make a big difference for a lot of people.”
If you come into some unexpected money, consider contributing the entire amount to your retirement account, Mahoney says.
“Seize opportunities when you have money come in that you didn’t anticipate,” he says. “A gift, an inheritance, a salary increase — try to capture these few dollars before they flow through your monthly budget. Those are great, one-time opportunities to put a lump sum into something like an IRA.”
The maximum annual IRA contribution you can make is $6,000 for 2022 if you are younger than 50, and the maximum 401(k) contribution is $20,500. After 50, though, those maximums get bigger: you can contribute an additional $1,000 to your IRA for 2022 and an extra $6,500 to your 401(k) each year.
See if your employer matches retirement contributions. The average value of an employer’s promised match works out to 4.5% of pay, according to Vanguard’s How America Saves 2021 report.
“So many people don’t take advantage of their retirement accounts and the matching their employer does,” La Spisa says. “And that’s free money. You’re just picking up dollars off the ground.”
The Social Security Trust Funds include two different trusts: Old-Age and Survivors Insurance and Disability Insurance. Both are expected to run out by 2034, according to a 2021 report by the Social Security Administration. This means that if no action is taken, Americans could end up receiving about 78% of expected benefits.
Even now, the average Social Security payment is only about $1,600 a month.
“People still believe Social Security is what they are going to retire on, and they don’t realize Social Security is designed to be a supplement, not a pension,” La Spisa says.
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