This week, I was one of the speakers at a Women of Wisdom luncheon sponsored by the Sarpy County Chamber of Commerce. One of the topics I discussed was the importance of saving, particularly for retirement.
Most professionals suggest that you consistently save 15% of your income for retirement. Over time, the power of compounding combined with consistency of saving can really work in your favor. Let’s look at an example.
At age 25, you land a job paying $40,000 per year. You are used to the college lifestyle of living on virtually nothing, so you commit to putting 15% of your salary, or $6,000, into retirement savings each year. Over the next 40 years, you never get a raise and you earn 8% return on your investment. During that 40 years, you will have invested $240,000 into your retirement plan. At age 65, your retirement nest egg will have grown to $1,554,339!
We know, of course, that your income will change over those 40 years. Yet, the point is that committing to save 15% of your income for retirement will make your retirement years much easier.
Consider these statistics:
- 31% of Americans have no retirement savings or pensions (some studies put this figure as high as 45%).
- 38% of Americans have no plan to retire or plan on working as long as possible because they feel they can’t afford to retire; i.e. they don’t have enough saved for retirement.
- 65% of current retirees receive more than half of their income from Social Security.
- 28% of current retirees depend on Social Security for 90% of their income.
- The average Social Security benefit is $1,294 per month or $15,528 per year. So, based on the average benefit:
- 65% of current retirees live on less than $31,100 per year and.
- 28% of current retirees live on less than $17,300 per year.
Many people feel like they can’t afford to consistently save 15% of their income for retirement. However, almost all of us can find places where we can change our spending behavior and put those dollars into retirement savings. If you stop at a coffee shop every morning for that special coffee, purchase snacks from the vending machine at work, eat out for lunch, or purchase a soda to drink on the way home, you are probably spending at least $5 per day on one or more of those items. Multiply that $5 times 30 days in a month, it becomes $150. If you put that $150 into a retirement account each month from age 25 to age 65 and earned 8% on your investment, you will have $523,651 at age 65. Surprising what a daily cup of coffee can add up to!
Another easy way to save is to not spend your raises. Any time your income increases, don’t increase your spending. Put that extra income into savings. If you are making $40,000 per year and you are blessed with a 4% raise, put that extra $1,600 into savings. Make this commitment every time you get a raise and your savings will add up quickly. This takes discipline but it is well worth the effort. You will thank yourself when you retire.
If you don’t want to become one of those statistics who are depending on Social Security for most of their retirement income, plan ahead and save, save, save. As Benjamin Franklin said, “If you fail to plan, you plan to fail.”
Judith Ackland has more than 26 years of experience in accountancy and financial planning, including seventeen years as a CFO of a diverse business. She started Crystal Financial in 2010 to help a wide array of individuals, families, and business owners better understand their finances and how good financial management could help them achieve their goals. Judith has an MA in Professional Accountancy from the University of Nebraska at Lincoln as well as a Certified Public Accountant Certificate and a Certified Financial Planner designation.
