Saving for Retirement in Your 20s: Doing the Math

    Saving for Retirement in Your 20s: Doing the Math

    By Amy Fontinelle

    Saving for retirement in your 20s can be challenging both mentally and financially. It’s hard to envision a time 35, 40, or 45 years in the future when you might not need, want, or be able to work anymore. And it can be hard to save money when you’re just starting your career since an entry-level salary plus student loan debt mean your cash flow is limited. What’s more, the headlines about the massive sums millennials will need to amass to retire — $1.8 million to $2.5 million, according to one USA Today article1 — might seem so daunting that you don’t see the point in trying.

    Plus, there are other things you could do now with any extra money you might have: go out with friends, travel, save for a house. So why bother saving for retirement in your 20s? Why not wait to set those financial goals until your 30s or 40s when you’ll probably be more financially comfortable and when retirement is no longer such an abstract concept?

    Savings, Compound Interest, and Retirement

    Compound investment returns are on your side when you start saving for retirement early. Consider three scenarios, calculated with one of the more popular online calculators:

    Saver 1: Age 22
    Goal retirement age: 65
    Years to accumulate retirement savings: 43
    Monthly savings: $500
    Average annual investment return: 8 percent
    Total savings by age 65: $2,255,844 before taxes and inflation

    Saver 2: Age 32
    Goal retirement age: 65
    Years to accumulate retirement savings: 33
    Monthly savings: $500
    Average annual investment return: 8 percent
    Total savings by age 65: $972,542 before taxes and inflation

    Saver 3: Age 42
    Goal retirement age: 65
    Years to accumulate retirement savings: 23
    Monthly savings: $500
    Average annual investment return: 8 percent
    Total savings by age 65: $395,866 before taxes and inflation

    When you start saving $500 a month at age 22, you’re contributing an extra $120,000 in principal compared with starting at age 42. But there’s a huge difference between that extra $120,000 in contributions and the extra $1.86 million you end up with as a result of investing that principal for an extra 20 years and giving it an extra 20 years to compound. The earlier you start, the easier it is to end up with the nest egg you need. A seemingly unattainable sum becomes a realistic financial goal.

    Saving Less: Is It Still Worthwhile?

    Maybe you can’t save $500 a month when you’re just starting out. Ideally, that’s what you’d save on a $40,000 salary, following the conventional wisdom that you should save 15 percent of your gross income for retirement. But that might only be attainable if you’ve landed a job in a high-paying field or if you’re living with your parents to help make ends meet while you get started in your adult life. Let’s assume you can only save $100 a month for retirement. How does the math look then?

    Saver 1: Age 22
    Goal retirement age: 65
    Years to accumulate retirement savings: 43
    Monthly savings: $500
    Average annual investment return: 8 percent
    Total savings by age 65: $451,169 before taxes and inflation

    In this scenario, you come out more than $50,000 ahead by saving $100 a month starting at age 22 versus saving $500 a month starting at age 42 in our original comparison.

    How much would you need to save per month if you waited until age 32 or 42 to start saving and you wanted to end up with the same $2,255,844 you would amass by starting to save $500 a month at age 22, assuming the same 8 percent rate of return?

    Starting at age 32, $1,150 a month with get you close: $2,236,846 after 33 years, before taxes and inflation. Starting at age 42, $2,800 a month will get you $2,216,848 after 23 years, before taxes and inflation.

    It’s easy to think that it will be easier to save larger sums in the future because your income will probably be higher, but your cash flow will likely have new demands on it: paying a mortgage, raising children, saving for your kids to go to college. (Related: Paying for K–12 Private School Tuition.)

    Simplifying the Retirement Challenge

    There are a few ways to make saving for retirement easier and get closer to that $500 a month goal:

    1. Get your 401(k) match. Not everyone has access to a 401(k) and not all employers who offer 401(k)s offer matching contributions. But if you can contribute to a 401(k), kick in enough to get your employer’s match. That’s less savings that has to come out of your own account.

    2. Refinance your student loans. Maybe you already have the lowest possible interest rate on your student loans, but if you don’t, refinancing could improve your monthly cash flow and make it easier to save for retirement. Marketplace lender SoFi might be able to give you a fixed rate as low as 3.5 percent.2

    3. Choose the right brokerage. Some brokerage firms have rock-bottom account opening and investment requirements. Vanguard says it will let you get started with a $1,000 investment in a target-date retirement fund, which has a mix of stocks and bonds based on your estimated retirement date.3 Fidelity says it will waive its $2,500 minimum when you make $200 automatic monthly contributions from your bank account to your IRA.4 Charles Schwab says it will let you get stared with just $100 a month in automatic investments.5

    No matter how much or how little you can afford to save for retirement in your 20s, it’s important to get started. Overcoming the hurdles of opening your first retirement account, learning how to transfer money into it or setting up automatic monthly contributions, and figuring out how to invest those contributions will put you on the right track to starting a good habit that will serve you well if you follow it consistently over your working years.

    More information:

    Retirement Planning Calculator

    Millennials and Retirement: The To-Do List

    Retirement Planning: How to Get Started

    1 Robert Powell, “Millennials’ new retirement number? $1.8 million (or more!),” USAToday.com, March 29, 2016.

    2 SoFi.com, advertised rate as of May 10, 2016.

    3 Vanguard.com, “Vanguard Target Retirement 2055 Fund (VFFVX),” Overview tab, Fund Facts box, accessed May 9, 2016.

    4 Fidelity.com, “10 Myths of IRA Investing,” accessed May 9, 2016.

    5 Schwab.com, “Index Funds,” accessed May 9, 2016.

    The information provided is not written or intended as specific tax or legal advice. MassMutual, its employees and representatives are not authorized to give tax or legal advice. You are encouraged to seek advice from your own tax or legal counsel.

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