Most of us are born procrastinators. That’s why we start saving late in life and hope to make up the difference by hitting the lotto or, if we must, by working longer. Neither is a great strategy.
The odds of hitting a Mega Millions jackpot are, of course, insanely long—around one in 176 million. Remarkably, one in three Americans say this is their best shot at financial security. Working longer has its issues as well, especially for low earners and those in physically demanding jobs.
Saving early and letting your gains compound for 40 years is really the best option. To make that point, this Forbes blogger offers an intriguing math question:
“If a wagon train averages 10 miles a day for the first half of the Oregon Trail, how fast does it have to travel the second half to average 20 miles a day for the entire journey?”
The knee-jerk response is, naturally, 30 miles a day. But, as you might imagine, that wouldn’t be worth writing about and isn’t even close to correct. The blog continues:
“If the trail is 2,000 miles long, to average 20 miles a day you would have to travel the entire trail in 100 days. But if you averaged 10 miles a day traveling the first 1,000 miles, you would have already used up 100 days. You would then have to travel the second thousand miles instantly to overcome your slow start.”
That might be apparent to a mathematician. But for most people it’s a surprise—and it describes the predicament of those who start saving late. They face an almost impossible task and are destined to downsize their expectations.
Fidelity Investments recently published a guide as to how much you should have saved by various points in your life in order to be on track. In an encouraging sign, young people seem to be getting started much earlier than their parents. According to a report in the Wall Street Journal:
“Of employees under age 25, 44% participated in their companies’ 401(k) retirement plans in 2011, up from 27% in 2003, according to data on millions of employees whose companies’ retirement plans are managed by Vanguard Group. Of those ages 25 to 34, 63% participated in 2011, up from 58% in 2003.”
For those who start late, though, retirement security is an uphill climb. Here’s Forbes’ analysis of how a late start affects your required savings rate:
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- Start at age 15, and you need to save 8% of annual income for life.
- Start at age 20, and you need to save 11.1% of annual income for life.
- At age 25 you need to save 15.4%.
- At age 30 you need to save 21.4%.
- At age 35 you need to save 30.1%.
- At age 40 you need to save 43.2%.
It just gets worse from there, so that if you do not start saving until age 50 you need to save every dime you make. This is just one person’s model, and it all becomes much more feasible if you ratchet down expenses. According to the analysis:
“Saving 100% of your lifestyle sounds impossible, but it is not. If you earn $100,000 after taxes, you must limit your lifestyle to $50,000 and save the remainder. This strategy will allow you to retire at age 65 with a lifestyle of $50,000.”
This exercise dovetails nicely with the Herculean assumptions in the Fidelity report. The point isn’t so much the precise nature of the savings rates cited, but how delaying even as little as five years changes the calculus.