Return on Retirement

The $100K-plus problem with not saving while you're young

Elena Leonova | Getty Images

More than 25 percent of all Americans have no savings at all, let alone a retirement nest egg.

But each year that you wait to start saving for retirement could mean thousands — even hundreds of thousands — of dollars in savings when you eventually need it.

In one scenario by Dara Luber, a retirement and long-term investing expert at TD Ameritrade, the total cost of delaying saving for retirement by 20 years is nearly $100,000.

Luber factored in investing $100 a month for 20 years starting at age 21 and assumed a 5 percent annual return. Compounded monthly until age 67, that's just over $150,000. Starting just five years later at age 26, alternatively, came out to slightly more than $117,000 at retirement age, or $33,000 less. The cost of waiting 20 years nets only $55,000 — a difference of $95,000.

"The sooner you start, the more time you have to compound that growth," Luber said. The value of your retirement portfolio when you're ready to tap it will be largely based on the amount invested and the length of time it was invested. Time can also correct big market swings, like the one following the U.K. vote to leave the European Union, which can quickly erase a portion of your retirement savings.

That's the missed opportunity many face.

"A lot of people are waiting to get started saving for retirement," said Judith Ward, a senior financial planner at T. Rowe Price. For someone in their 20s, Ward recommends saving 10 percent of your income. "By 30 you should have saved [the equivalent of] half of your salary," she said.

In fact, 29 percent of millennials are saving more than 10 percent of their incomes, according to a recent Bankrate study, up from 22 percent in the year earlier. For the rest, record student-loan debt, stagnant wages and higher living expenses compared to a generation ago are obstacles that prevent many young investors from stashing that much. 

To that point, 18 percent of adults ages 18 to 29 said they have too much student loan debt alone to consider saving for retirement, a separate survey conducted by Bankrate found.

The sooner you start, the more time you have to compound that growth.
Dara Luber
retirement expert at TD Ameritrade

To come up with the cash, Luber suggests writing out how much you have to spend every month and what you have to spend it on, including rent, car payments and food, and then what you want to spend the rest on, in order of importance, whether that's going out to dinner or to the movies, "then cut the bottom two or three," she said.

With the savings, max out your contributions to a 401(k) plan, particularly if there is an employer match, Ward advised. Those without an employer plan can set up a traditional or Roth individual retirement account. Additionally, those who are self-employed can also make tax-deductible contributions to a Simplified Employee Pension account.

Millennials in a low tax bracket now should consider a Roth IRA because they can make after-tax contributions up to $5,500 a year and earnings grow tax free, Ward said. Then they can make withdrawals tax-free after age 59½, and there are no required minimum distributions.  

A 21-year-old who invests $100 every month in a Roth IRA could see her/his nest egg grow to more than $200,000 (assuming a 5 percent annual return and a marginal tax rate of 25 percent) by age 67, according to Bankrate's Roth IRA Plan Calculator