Are you ready to be on vacation for 20 or 30 years?
That’s what planning for retirement compares to for many people as life spans have increased dramatically over the past few decades. A male who celebrates his 65th birthday today can expect to live until age 84 on average, according to the Social Security Administration. A woman can expect to live to age 86.
With the potential to live decades in retirement, it’s more important than ever to start saving as soon as possible. The more time you have, the better your chances of accumulating enough assets to live comfortably once you stop working.
No matter where you are on the retirement planning continuum, there are specific time-related and time-tested strategies that can help you prepare.
“When you invest for a long-term goal like retirement, an event that for many of us is years and years down the line, time is on your side,” says Elaine Sarsynski, executive vice president for MassMutual’s Retirement Services division. “The sooner you start saving and investing, the more time you have to accumulate retirement savings and put the power of compounding to work. Time also allows you to ride out stock market volatility and potentially recover from underperforming years.”
Although the stock market can fluctuate daily, monthly and yearly, the Standard & Poor’s 500 has netted an average annual return of 9 percent since its inception and 11.5 percent in the past 30 years.
The longer-term gains attributed to stock investing are particularly helpful to younger investors in their 20s and 30s, according to Sarsynski. By saving and investing 10 percent of your income a year, including an employer match if available, you can potentially accumulate enough assets to replace between 60 percent and 80 percent of your income in retirement, she says.
Those who are well into their 30s, 40s or older and who haven’t started saving should consider putting aside 15 percent or 20 percent of their income. Saving larger percentages of salary can help late savers catch up, Sarsynski says.
What if you are in your 50s or older and have little retirement savings? Time can work for you as well if you extend your retirement date by working longer, giving yourself more time to save and postpone taking your Social Security benefits. The IRS allows Americans age 50 and older to save an additional $5,500 above the $17,500 annual limit on retirement plan contributions. In addition, Social Security retiree benefits increase by 8 percent every year income is deferred past the full retirement age.
A key benefit in saving and investing for retirement, no matter what your age, is the power of compounding, according to Farnoosh Torabi, best-selling author and financial planning coach. Your percentage of earnings growth is derived from your current and past contributions as well as previous earnings, exponentially increasing with time. That’s why it’s so important to start saving as early as possible, Torabi says.
As an example, a 30-year-old who has $10,000 in her 401(k) retirement plan and contributes $300 a month until retiring at age 67 would accumulate $761,261. That’s based on an annual interest rate of 7 percent, compounding monthly.
Conversely, a 50-year-old with the same amount in his retirement plan and who contributes $300 a month would wind up with $149,795 at age 67. Even doubling the monthly contribution would yield only $266,833. So time is of the essence.
Many employer-sponsored retirement plans such as 401(k), 403(b) and 457 plans feature calculators to help you determine how much income your savings can generate both today and the future. The SSA also features calculators to help you determine your Social Security retirement benefits.
“Everyone should take the time to calculate their estimated income and expenses in retirement before deciding when they will retire,” Torabi says. “If you have a gap between your projected income and expenses, you need to increase your savings. Many people ultimately decide to live a little more frugally today so they can afford to retire more comfortably tomorrow.”
For more information about planning your retirement, go to www.retiresmart.com.
