The Cost of Waiting

The Cost of Waiting

More Years, More Money

The good news is, odds are, you’ll probably live longer than past generations. The bad news is, living longer means you’ll need more money for retirement – possibly up to 30 years’ worth. Whatever your retirement dream is – whether it’s traveling the world, playing golf or just relaxing and enjoying the grandkids – the last thing you want to worry about is outliving your money.

A good rule of thumb is to save enough money to make sure you live the way you’ve always lived. You can’t expect to spend less on living expenses in your Golden Years than you do today. Most financial advisors agree that you'll need 70-80 percent or more of your pre-retirement income to maintain your lifestyle in retirement.

Also keep in mind that the cost of retirement living continues to increase as the cost of healthcare, housing, energy and other costs increase. And don't underestimate the power of inflation, as even low inflation can damage the purchasing power of your retirement dollars. For example, if you project a 3% inflation rate over the next 25 years, a gallon of milk purchased today for $4.29 will cost you $8.37 in 2031.

So, while your expenses may at best remain the same, or even increase, you can’t expect the same for your income. That’s why every day that goes by in which you don’t save is another dollar you likely won’t have in retirement.

Save now, pay later

One of the best and simplest ways to begin saving is to take advantage of your employer-sponsored retirement plan, such as a 401(k), 403(b) or 457 Deferred Compensation plan. And if you’re worried about whether you can afford it, keep in mind that such plans can save you money today and down the road. Here’s how:·

• Less tax today: Contributions to your plan are made prior to income tax deductions, which means you’re paying less in current taxes from each paycheck.
• Less tax tomorrow: Your account grows tax deferred, meaning you won’t pay taxes on it until you withdraw funds from the plan. Since you’ll most likely be in a lower tax bracket at that time, you’ll pay less in taxes than you would today. (Note: Penalties may apply to early withdrawals – usually before age 59½.)

Your money is your money-maker

When you invest, you earn interest on your money. And then that interest earns interest. That’s called compound interest, and it’s how your account grows over time. The sooner you start, the more you can save.

Compounding circumstances

Liz and Jenna, both 24, started work for the same employer on the same day. After a year, when she was eligible to participate in her employer’s plan, Liz began making an annual contribution of $1,000. Jenna chose to wait another 10 years before joining the plan. Liz stops investing after 15 years, while Jenna continues to invest $1,000 a year until she retires at age 65.

Both contributed $1,000 a year. Both earned an 8 percent rate of return on their investment. Liz invested for 15 years and a total of $15,000; Jenna invested for 31 years and a total of $31,000 – more than double Liz’s investment. Yet Liz still came out ahead. That’s the power of compounding!

Beware of severe “wait” loss

Still not convinced that putting off saving for retirement will cost you down the road? The following chart shows that waiting just five years may cost you more than you may think (depending on your investment choices and market conditions).

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