Bob Powell, editor at Retirement Daily, joins TheStreet to highlight the crucial benefits of beginning retirement savings early.
Transcript:
CONWAY GITTENS: What are the big issues facing retirement savings and retirees like, what are the things that the collective we should be talking about, but we’re not talking about?
BOB POWELL: Yeah, I think the very first thing that at least people, I think get wrong about retirement is the need to start saving as early as possible. The longer you wait, the less you’ll be able to take advantage of the power of compounding and the more you’ll have to save later in life. So you should, when you enter the workforce, you should shoot to save at least 15% of your income. And then you should try to hit certain benchmarks as you go through your work life. So at age 35, for instance, you should have maybe 1 to 1 and 1/2 times your salary saved in your 401(k) or your IRA, and that by the time you hit 65, you should have somewhere between 7 and 1/2 and 13.5 times your salary saved for retirement. So think, or think about starting early and then think about setting these goals for yourself as you hit certain ages.
CONWAY GITTENS: And how do we scale up as we age? Well, in terms of scaling up, I would think about it this way. So I mentioned the benchmarks. One of the things that you need to also consider is if you’re behind the eight ball in terms of your savings, you really need to think about, well, maybe I need to save more than 15%. So for instance, I’ll give you a worst case example. Let’s say you are age 60 and you haven’t saved a nickel for retirement. Well, at that point, when you hit age 60, you’re going to need to save at least 33% of your income to make up for what you didn’t save when you were 20, 30 and 40 years old. On the other hand, if you start saving, you know, when you’re in your 30s, you will be able to save at a moderate percentage that allows you to, one, fully fund your retirement, but also be able to enjoy the things in life that you want: to vacation here and there, saving for college, paying down student loans, buying a house, buying a second home. Et cetera. Et cetera. So it really is a matter of I think, you know, one of the things I like to say is, you know, everyone should go back and reread the Aesop’s fable of the ant and the grasshopper. The ant set aside food for the winter months when there would be no food, and the grasshopper didn’t and went begging the ant for food during the winter months. We need to be more like ants than grasshoppers. As you think about how I can save for retirement, but also how I can enjoy life.
CONWAY GITTENS: I guess a gradual Approach takes the sting out of actually setting the money aside.
BOB POWELL: Yeah, yeah, for sure. I mean, again, you know, you might not be able to save 15% of your salary in year one, but you might be able to save 6% And then assuming that your employer matches up to half of that. So you’d be saving at a rate of 9%, which is a really good starting place for many people who might be in their 20s and who might be once trying to pay down their student loans, trying to enjoy life if they’re living in whatever New York City or Austin or wherever they might be. So I think that gradual approach, and then what you would do is you want to set your 401(k) plan on something called auto escalation. So every year it would escalate from, say, 6% to seven, 7% to eight. And those escalations would be painless, in part because with hope you’ve had a salary increase and that one percentage increase in your salary deferral rate won’t put a big dent in your standard of living. So I think that’s one thing to consider is auto escalation. And also if you can afford it, every time you do get a pay raise, reevaluate how much you’re saving, maybe you’ll be able to save. Maybe, maybe you save from 6% to 8% or from, say, 8% to 10% So, you know, don’t the be mindful about the money that’s coming in, and how you’re allocating it between savings and enjoyment and essential expenses.
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