Summary: Start planning for retirement as soon as possible, regardless of age, to support financial security in your golden years. Procrastinating on saving for retirement leads to higher costs, whereas starting to save early allows you to take advantage of compounding interest. Strategies for late starters include investing more, maximizing retirement plans, increase tax efficiency, and starting side gigs.
- Start Now: Regardless of age, the earlier you start planning, the better.
- Generational Shift: Younger generations are starting to save for retirement earlier.
- Cost of Waiting: Delaying savings significantly increases the amount you need to save later.
- Compounding Interest: Saving earlier can help your assets grow significantly over time due to compounding.
- Late Starters: It’s never too late to start with strategies to catch up on retirement savings.
- Immediate Actions: Start planning for retirement right away.
The short answer to the question, “When should you start planning for retirement?” is now, regardless of your age. The more time you have to plan, save, and invest for retirement, the better.
The waves of Baby Boomers crossing the retirement threshold each day offer a critical lesson for younger people who have yet to put retirement in their line of sight.
A 2023 net worth and retirement survey conducted by Credit Karma helps us put this situation into a clearer context. The survey found 21% of Americans ages 59 and older have a net worth of $0 or a negative net worth. With a net worth of $0 or below, these older Americans have little, if anything, saved for retirement.
A 2023 Employee Benefit Research Institute survey sheds more light on retirement confidence. Only 18% of Americans overall are very confident in their ability to have enough money for retirement. On the opposite side of the spectrum, 36% of Americans are either not too confident or not at all confident in their ability to save enough for retirement.
With that in mind, let’s take a closer look at when to start planning for retirement.
The Median Age When People Actually Start Saving for Retirement
A 2022 survey conducted by the Transamerica Center for Retirement Studies reveals a positive long-term trend in retirement savings. We know overall confidence in retirement savings is relatively low.
However, it appears a generational shift toward starting earlier has occurred. In other words, younger Americans are saving for retirement starting at an earlier age. The survey found that the median age when retirement savings began was:
- Age 35 for Baby Boomers.
- Age 30 for Generation X.
- Age 25 for Millennials.
- Age 19 for Generation Z.
However, not everyone will align with the median for their generation. There are people who started saving earlier and who started later.
The Cost of Waiting to Save for Retirement
Time is an incredibly valuable asset when it comes to retirement planning, when used wisely. Time is also a decreasing asset, losing value with each passing day that money is not put to work. And, as the value of time is wasted, the cost of your financial goals increases. Sometimes, they reach the point where they become prohibitively expensive and unattainable.
Consider the following chart:
| Starting at age | Years to age 65 | $50,000 | $100,000 | $250,000 | $500,000 | $1,000,000 |
|---|---|---|---|---|---|---|
| 25 | 40 | $33 | $66 | $124 | $328 | $655 |
| 30 | 35 | $44 | $88 | $220 | $440 | $880 |
| 35 | 30 | $60 | $120 | $300 | $601 | $1,202 |
| 40 | 25 | $84 | $168 | $420 | $840 | $1,679 |
| 45 | 20 | $122 | $243 | $608 | $1,216 | $2,433 |
| 50 | 15 | $187 | $374 | $935 | $1,871 | $3,741 |
| 55 | 10 | $322 | $643 | $1,610 | $3,220 | $6,440 |
For a 25-year-old who wants to retire with a million dollars at age 65, she must contribute $655 a month (assuming an average rate of return of 5%). If she waits until 35 to start saving, the amount she must save for retirement nearly doubles.
People who wait until 45 to begin saving must either save a more significant portion of their income each month or take much more risk, or both. The value of time is a key factor to consider when planning for retirement, especially at the start of the process.
Time Plus Compounding Interest Creates Magic
If you were given the choice of receiving $10,000 each day for a month or a single penny that doubled in value each day for a month, which would you choose? If you choose the former, you may feel kind of silly to learn that it provides a lesser return.
At the end of that hypothetical month, your $10,000 daily gift amounted to $300,000. That’s a good return, but it pales in comparison to the doubling penny. That penny would have produced around $5 million. Such is the magic of compounding.
Compounding interest is a simple concept that can yield powerful results when used correctly. It essentially means earning interest on a principal amount, then adding that interest earned to the principal. The combined amount will then earn interest going forward, as will the process of adding earned interest to the principal.
Given enough time, compound interest can provide a substantial return.
To illustrate that magic, consider two friends, Allen and John, both age 25. Allen starts saving $10,000 a year right away but stops at age 40. John starts saving $10,000 a year at age 40 for the next 30 years, unil the point when both friends retire. Both earned an average annual return of 6%.
- Allen contributed $150,000 over 15 years and accumulated more than $1 million.
- John contributed $300,000 over 30 years and accumulated $838,000.
Allen invested just half the money that John did, but he had the time to allow compounding interest to do its magic. When should you start a retirement plan? As soon as possible, to get more support from compounding interest.
It’s Never too Late to Start Planning and Saving for Retirement
If you are in your 40s or 50s, you have less time to save for retirement. However, there are still strategies you can use to get back on track.
Invest More
That may be easier said than done for many people. However, if you’re serious about financial security, you can find the money. One way would be to get into a retirement mindset now and start adjusting your lifestyle.
If you haven’t saved enough to meet your retirement goals, you’ll likely have to downsize your lifestyle when you stop working, so why not do it now? Buy less house. Drive a more modest and affordable car. Forgo a few marginal luxuries now so you can enjoy more of them later.
In doing so, you can free up thousands of dollars each year that can go into your retirement plans. In addition, by smoothing out your consumption between now and when you stop working, you’ll have an easier transition into a retirement lifestyle.
Max Out Your Retirement Plans
When should a person begin contributing to a retirement plan? As soon as possible.
If you have access to a retirement plan at work, take advantage of the matching contribution your employer offers. Also, if you’re over the age of 50, you can contribute an additional amount as a “catch up” contribution in 2024. If you have an Individual Retirement Account (IRA), you can make an additional $1,000 catch-up contribution.
Keep the Gas on Your Investment Returns
Many people fail to reach their retirement goals because they don’t generate sufficient returns on their investments. In your 40s or 50s, you still have enough time for the stock market to go through several cycles.
Work with a financial advisor to develop an investment strategy based on your return objectives and risk profile. A properly diversified portfolio can drive returns with less volatility.
The key is to stick with the strategy and avoid the typical behavioral mistakes investors make, such as trying to time the market or chase performance.
Start a Side Gig
If you have been harboring any ambition of starting a business or monetizing a hobby in retirement, get started now. It can take several years for any new venture to generate consistent income. However, with a part-time effort now, you can generate some extra income to boost your savings and, by the time you’re ready to quit your day job, you could have a good business.
How You Can Start Planning for Retirement Right Now
While it’s never too early or late to plan for retirement, the biggest obstacle is getting started. There’s no better time than the present.
Remember, each day you wait to act, the more you must save for your retirement. So, whether you’re 25 or 30 with an extended time horizon, or 40, 50, or 60, and on the gliding path to retirement, Dechtman Wealth Management can help.
Our fiduciary financial advisors can help you develop a retirement plan focused on your best interests. The goal is always to optimize your time and resources for achieving financial security in retirement. Download A Guide to Having Enough Money in Retirement here.
