Don't Wait! How to save a $680,000 for retirement

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Aug 26

Do you know how much you need to set aside to retire comfortably?

In a previous video I talked about how much you need to have at retirement. If you haven't seen that video make sure to check it out. In that video we ended up with an example of a person that needs $680,000 to retire at the age of 67. Today, I want to work backwards and talk about how much we need to save to be able to accumulate $680,000 by retirement.

This discussion will rely on knowing how compound interest works, so make sure to watch that video too.

To solve this problem we will need to make some assumptions.

Let us assume that you are currently 25 years old and plan on retiring at 67. This means you have 42 years to reach your goal.

The other assumption we need is an average interest rate that you will earn per year. Now watch out here, there are a lot of social media financial gurus that want to sell you on possible returns and they are often exaggerated. The other day I watched a video of a person that was preaching about 100% return meaning that your money would double every year. Don’t believe the hype. Make sure to use realistic numbers.

So how should we determine your rate of return? I guess it depends on where you want to save your money. If you are saving it in a savings account, or low interest rate account, it is going to be hard to meet your goal. Investing in the market, using a diversified approach is the best way to go for long term investment. What we can do is look at what the average return is in the market. Obviously, historical averages do not predict future outcomes, but it's a starting point.

According to this source, the average return on the S&P 500 for the past 10 years was 13.9%. Past 30 years, it was 10.7% and for the past 50 years it was 10.9%. So for simplicity, let us pick 10% return per year.

The next thing we need is to pick how much we want to end up with, and we have agreed we want to end up with $680,000 in 42 years.

There are many ways to calculate the monthly contribution needed to meet this goal. I like Nerdwallet’s calculator on their website. Let us check it out.

Wait…..Thats it?!!!!! $87.81 per month for the next 42 years will get me there? Come on, That is so doable.

Let's say that you decide to wait till you are 35 to start taking retirement seriously. So now you only have 32 years. How much do you have to save to meet your goal?

Let us plug the numbers.

Waiting an extra 10 years to start saving increases your monthly required contribution to $244. This is a common mistake that people make, they think that they can easily defer starting to save for retirement till they have more money to save. We always believe that the future is a better time to save. Guess what 3 years ago you thought now would be a good time to save, so start saving!. Start with anything, get in the habit of saving, then gradually increase it. Just like anything else in life, getting started is the hard part. This reminds me of working out. The hardest part of any workout is getting to the gym, once I am there everything is fine. So get to saving! Use the comments section to tell me how much you will set aside this month, 5? 10? 20 dollars? If you save already, how much to set aside every month?

Ok Let us try another example.

Say you have a $150 to save per month and you start saving right out the gate with your first job at the age of 25. Let us check out this excel sheet I made.

This means you will have $1.2 million at retirement. It pays to save, save early, and have a good interest rate.

But we remain with the question of how do we start saving $150 dollars a month?!? Well that's where the video on budgeting and knowing your spending habits comes in. Tracking your spending and figuring out what your priorities are is critical. Make sure to watch that video!