What Happens When You Start Saving for Retirement Mid-Career
Saving for retirement doesn’t need to be an all-or-nothing endeavor, and there is some truth to the old saying, “better late than never.”
The idea for this post came to me after seeing a couple of widely divergent news items:
First: The percentage of workers in the United States who have no retirement savings is 20% according to this study from Bankrate.com. For respondents to the Bankrate survey, 39% told researchers that their regular monthly expenses were too high to let them save for retirement. 16% reported that they didn’t make enough in their jobs to allow them to save.
According to the Vanguard “How America Saves” report, in 2017 the average 401(k) account balance was $103,900 while the median was $26,300.
Okay, this is pretty crappy news.
Second: Let’s turn to the other end of the savings spectrum — the FIRE movement — that is getting a lot press these days. Haven’t heard of this? FIRE stands for “Financial Independence, Retire Early” and followers tend to be younger workers making professional salaries (think engineers, techies, etc.) who embrace the notion of extreme frugality so that they can invest half or more of their salaries and then “retire” around the age of 40 or so. It’s easy to find news about FIRE (see an article from the New York Times here) and there is even a documentary about FIRE coming out in 2019.
But what if you like your career and don’t want to “retire”? Or what if you have a job where saving 50% of your income is impossible?
I had that question too, so I thought that I would do a thought experiment.
What Does It Look Like When You Start Savings for Retirement Mid-Career?
DISCLAIMER: This exercise does not take into consideration all the up’s and down’s of life — it is for discussion purposes only. Take note that your own mileage may vary.
Okay, let’s set the stage with some parameters for this discussion:
Age: 45
Annual Salary: $50,000 (taken from PayScale.com)
Retirement Savings Rate: 10%, or $5,000 ($417/month)
Net Income (after retirement savings and taxes): $38,000/year ($3,167/month)
Annual Compound Interest: 7% (for background on this assumption see this article from The Simple Dollar)
Years Until Retirement: 25 (assuming a retirement age of 70)
Operating within these parameters, what wealth can you generate at a savings rate of 10% with compounding interest of 7% for 25 years?
Using this Simple Savings Calculator from Bankrate you will have saved about $330,000.
If we use the Four Percent Rule regarding retirement withdrawals, you will be able to take out about $13,200/year, or about $1,100/month.
Additionally, using the Quick Calculator from Social Security your estimated monthly benefit will be $2,255/month.
This quick calculation gives you a combined income of $3,355/month. Compared to your current net income of $3,167 per month, this forecasted retirement income should be enough to support your current monthly spending.
what have we learned here?
As I see it, there are two major lessons from this thought experiment:
As opposed to what the popular media conveys, you might not need to save $1,000,000 for retirement after all. As social workers and helping professionals you are used to making ends meet on less, at work and at home. As opposed to FIRE adherents you will not need to drastically cut your costs, because you might not be making six-figures (and you might not be spending them either). Your retirement savings combined with Social Security might be what you need to fund your retirement. In other words, don’t let perfect be the enemy of the good.
You definitely need to start saving for retirement today. There is an old Chinese proverb that says: "The best time to plant a tree was 20 years ago. The second best time is now." The same is true for your money, due to that magic called Compound Interest. But you might be reading this and thinking “How am I going to save $417 a month?” This is a good question. But remember that this amount is actually closer to $300 when you consider that it is pre-tax money. So how do you make changes to your cash flow to make room in your budget for retirement savings? See this Tips and Tricks post for some ideas.