Is It Too Late To Save?

Many of us have read about how "John" saved an amount of money every year from the time he was twenty until the time he was thirty, and then never saved another penny, but, when ready to retire, he had more money than "Mike" who saved the same amount of money every year from the time he was thirty until the time he was sixty.  That definitely makes you think that saving earlier is better than saving later and makes you wonder if you should even bother saving  if you aren't young any more.  However, there is another side to that story.

How Much Will I Have?

According to this compound interest calculator, if you save $1000 per month for ten years, at the end of ten years you will have $155,929.29 if your return is 5% per year.  If you then quit adding money and let it continue to compound at 5% per year, at the end of thirty more years, you'll have $ 696,652.20.  On the other hand, the person who saves $1,000 per month for thirty years at 5%, will have $835,736.38.  

If you change the return rate to 8% the person who saves for 30 years ends up with $1,500,295.18, while her earlier saving sister ends up with $2,013,986.09.  The moral of this story is that you only end up with more money in the end if the return rate is high enough.

Is There a Catch?

At first blush the idea of funding your retirement in your twenties, and never having to worry about it again sounds great, but is it as wonderful an idea as it seems? Is there a catch?  

Yes. Actually there are two:

First, inflation means that the money you save in your twenties is worth more than the money you save in your fifties.  

Second, most people get promotions, raises or better jobs as they get older.  Even without inflation, $1,000 is a bigger part of your paycheck in your twenties than in your fifties.

Third, for many people, their twenties and thirties are high expense years.  

Inflation

My first adult job was in 1983.  I was a first year school teacher so you know I wasn't getting rich, but I wasn't poor either. I made $14,300 per year.  To buy the same standard of living today would cost $35,144.98.  Using that $1000 per month figure, in order to not have to save today I would have to have saved more than I made (I don't remember exactly what my paychecks were back in the day, but I remember the first number was a "4".  Assuming that job has only kept up with inflation, then $1000 per month today would only be 1/3 of my income.  Big difference.

Increased Income

As I said, my first job was as a teacher.  Checking the salary schedule for that district, teachers get a $600/year raise for 25 years, so that the career teacher in her 50's makes about $16,000 more than the rookie.  Again, all things being equal, it is easier for the older teacher to save.

Different Expenses

Some people graduate from college with no debt, get a high-paying job and continue to live rent-free with Mom and Dad throughout their twenties--and they should be ashamed of themselves if they don't save.  However, many people today spend their twenties paying off student loans while toiling in jobs that aren't quite what they want either career-wise or salary-wise. 

Others have children and the expenses that some with them, especially when they are young--generally either daycare bills or reduced parental income due to reduced hours working. 

Young adults are either paying market-rate rent or buying houses at today's cost while many fifty year olds have either finished paying off the mortgage or are paying a much lower mortgage than is normal today.  

The Bottom Line

The bottom line is that compound interest is a wonderful thing.  The more you have, the more you make.  The stock market has been on a huge roll this year, and our net worth has increased by an amount that is about what our paycheck are--and we've been spending those checks.  

However, by the time the average person/couple reaches their 50's they are earning their biggest paychecks and they have most major child rearing expenses behind them.  If they are smart, their housing expenses as a percent of income are way down.  

How Much Does It Take?

Going back to the numbers in the first paragraph, if I had been able to save $1,000 per month at 5% for the first ten years of my working life (when I was making under $25,000 per year), and had never saved again, I'd have almost $697,000.  If I had started with nothing at 50, and was aiming for retirement at 65, with a nest egg of $697,00 and got 5% per year on my money, I'd have to save $2625 per month.  To put that in perspective, I've changed careers, but if I was teaching, I'd be earning $56,549 per year now.  While saving $2625 on that salary would be hard, it is at least less than the salary--and hopefully I wouldn't be starting at nothing in my fifties. 

It's Not Too Late

While saving earlier gives your money more time to compound, most people have some high-earning, low-expense years at the end of their career that allow them to bulk up retirement savings.  While you should save what you can for retirement throughout your career, know that you will likely have some "catch-up" years to put you over the top.  

*Part of Financially Savvy Saturdays on brokeGIRLrich.*