If you don’t start saving for retirement by age 40, you may need to rethink your long-term plans.
At that age, simply pouring more money into retirement investment accounts may not be enough to live out your retirement years the way you imagined, says Retirement Expert and author of Your Best Financial. says Anne Lester, author of “Life: Save Smart Now for.” The future you want. ”
Now, at 40, “I have to start thinking seriously about solving this challenge, not just thinking about how to save more,” she told CNBC Make It. “You either have to keep making money, you have to stop spending in retirement, or you have to fundamentally change what you consume.”
That may involve making major changes to your retirement lifestyle, such as downsizing your home, moving to a lower cost of living location, traveling less, or even working longer.
“If you don’t save money when you’re young, you’re taking away options from your future self,” Lester says.
Benefits of saving for early retirement
Recent data from Bankrate shows that 26% of Gen Z workers, defined as those between the ages of 18 and 27, did not contribute to their retirement savings last year and are not currently contributing.
By the time you’re in your 20s, Lester says, you may feel less financially secure and may not have enough money for retirement. That’s fine, but you don’t have to wait forever.
“If you’re in your early 20s, taking a year off isn’t a big deal,” she says. “But one of the tragedies of missing out on early contributions, especially if you participate in a 401(k) and have a company match, is that you miss out on free money that you don’t get back. is.”
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The earlier you start building your retirement funds, the more time your money will have to grow through the power of compound interest. Additionally, you’ll need to contribute a smaller portion of your annual income than if you start contributing later in life.
Experts generally recommend setting aside 15% of your annual salary, including a match with a company. But if you start after you’re 40 or older, that percentage jumps to more than 25%, Lester says.
Let’s say your goal is to retire with $1 million by age 65. According to CNBC’s calculations, if you start contributing at age 25 and earn 7% per year, you would need to put away $381 each month to reach your goal. But if you start at age 40, you’ll need to save about $1,234 each month to reach the same goal.
It’s possible to reach your $1 million goal with a slow start, but it will require significantly more money and may not be possible.
“If you wait until age 40 to start, you’ve missed out on about 20 years of compounding investment,” Lester says.
As it turns out, even setting aside a small amount of money for early retirement provides two benefits. One is to give your money more time to grow. And two, Lester says, because you start getting into the habit of saving, it becomes easier to keep saving over the long term.
“As you start to build up your savings muscle, it gradually becomes less intimidating, less intimidating, and less intimidating,” she says. “When you begin to redefine yourself as someone who saves and invests, you are on a lifelong path to having choices as you get older.”
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