You have waited until you are 32 years old to start saving and you still have 67 in your head as the retirement age. That means 35 years of compounding, but investing $500 per month at 5% will generate only about $542,000 by the time you hit 67.
To hit the $1 million mark with a 5% compounding, you are going to have to jump all the way up to saving $923 per month ($11,076 per year). If you get lucky and the average compounding is 6% per year, then you would only have to save $748 per month ($8,976 per year).
You have reached 39 years of age and knocking on the door of 40. Somehow you have ignored the endless demands to start saving for retirement. You now have just 28 years to save $1 million. Saving $500 per month is going to only grow to $350,000 at 5% compounding or $411,000 if you are lucky and get 6% in returns. Here is where reality sets in if you start saving later in life. If you stick with a 5% expectation for compounding over 28 years, it’s going to require savings of $1,427 per month (or $17,124 per year), and that gets you right up to the IRS maximum annual contribution of a 401(k).
Hopefully we have managed to demonstrate how crucial it is to start saving as early as you can and to start saving as much as you can. Life takes many turns, and there are some additional considerations.
First and foremost, financial markets and your investments probably will not grow at the same rate every year. It is also unrealistic to expect that the returns will be positive every year. You may have to consider along the way that you might need to adjust your savings higher as your income rises.
When you start at zero dollars saved without a conservative retirement plan, you have to contribute a lot more. If you come across money from inheritance, gifts, or stock options, these funds can obviously benefit your savings if you invest some of them along the way.
Many companies that offer 401(k) plans also have plans that will match 50% to 100% of your contribution up to a certain percentage of your income. You may consider saving less because of these matching funds, or you can treat them as an enhancement to your savings that can ramp up your post-career savings goal.
As you get older, your investing goals are going to change. Even if you are less aggressive, you should still consider using those IRS catch-up rules to enhance your retirement expectations.
If you are in your 20s or 30s, you might want to stay on top of legislative changes. Those statutory limits can change over the years, depending on the political winds.
Getting to $1 million may sound impossible, but now you see that it isn’t. However, you are going to need serious discipline. And don’t forget — by 2050, $1 million is probably going to sound and feel like a lot less than it does today.
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