When deciding how much to save in your 401K while you are in your 20's, it can seem like an unimportant decision. Or an unnecessary sacrifice for a time way off in the future.
But, let’s look at it from a different point of view. If you start saving at 25 you can “buy” retirement or financial independence for one-third less money. That’s right, you will actually have 2/3 of your money back to spend on things like vacations, cars, a house, clothes, concerts, etc. Whatever gives you joy in life. If you start saving sooner.
Contributing to your 401K now can save you a lot of money.
For those interested, here are the details:
- A general rule of thumb on retirement is to save 20X your current salary
- Assume: $50,000 a year salary
- Assume: 8% rate of return per year
If you start saving at 25 you only have to save $5,200 per year to reach $1,000,000 at 60. If you start at 45, you need to save $32,000 a year to reach the same goal! Cumulatively, our 25 year old saver buys retirement for a total cost of $187,200. Our procrastinating 45 year old saver needs to save $512,000 in total to reach the same goal.
Saving $32,000 a year sounds hard for a lot of people. $5,200 seems much more achievable. Further, consider that if your employer is a good one, they have some sort of matching feature. This means you can save less than $5,200 a year and comfortably reach retirement. Not bad right?
Before you decide to skip out on making 401K contributions now, we encourage you to think about how much you can save over your lifetime by doing so now. To discuss your own personal 401K situation, please feel free to reach out to us and we’ll guide you through the decision.
The material in this article, provided by Mulholland & Kuperstock Asset Management, is designed to provide informative and current information as of the date of the post. It should not be considered, nor is it intended to constitute, financial or tax advice or promise similar outcomes. For information on your personal circumstances, please contact Mulholland & Kuperstock Asset Management at 310-988-2158.