Retirement – it is something that everyone cannot wait for, and absolutely dreads at the same time. We all have to work, there is no way around it, and we all need money. Most have to work until they are at least 65 years old. When someone stops working they have time to reflect, relax, enjoy life and do whatever they want; or so they think. It used to be that after working at the same job for most of their life, they would get a pension from the company and comfortably sail off into the sunset. That is not the case anymore. It is individuals who are now in charge of making sure they have enough money to safely stop working, not companies. This is usually done through IRA’s and 401k’s. But how much is enough? Compared to the rest of the world, the United States ranks 19th in its citizens being able to retire when they want and without any further aid. That is not an encouraging thing to hear, especially to those just graduating college and are starting to wonder when, and how much, they should save. That magic number is likely to be higher than most think. Henry Blodget, CEO and Editor of Business Insider, has found an easy way to figure out how much someone should save or invest per month, at any point in their life, to retire with $1 million, and here is how to do it.
As expected, there are a few assumptions that have to be made to come up with this type of instruction. The biggest assumption is that each individual’s total savings and investments yield a 6 percent annual return, something Mr. Blodget admitted, can be hard to do. As expected, the earlier one starts to save and invest, the less they will have to put away each month to reach $1 million by they time they are 65. For example, if someone is 20-years-old, they only have to put away $360 per month. It does not sound like much, but most 20-year-olds are still two years away from graduating college and have student loans to pay before they can move out on their own, let alone save for the future. If someone starts saving at 30, the number jumps to $700 per month, and only goes up from there.
Here is a quick breakdown of how much someone will have to save, per month, if they start saving at a certain age. If one is starting to save and invest at age 20, they will need to put away $360 per month, age 25 is $500 per month, age 30 is $700, age 35 is $990, age 40 is $1435, age 50 is $3,421 and if you start at age 60, which is highly inadvisable, the person would have to save and invest $14,261 per month. Though it is not an exact science, or a cake walk, that is how to retire with $1 million and it is better to see it here today and know what to do, rather than 20 years down the road.
The key component to achieving these types of numbers is compound interest. Compound interest means that the interest one receives on savings and investments also builds interest. Business Insider created a very useful chart to demonstrate the benefits of compound interest if someone starts at an early age. They gave an example of three people investing over their lives and how much their saving’s yielded by the time they were 65. In their example, each person invested $5,000 per year. Person A saved from the ages of 25 to 35 (10 years), person B saved from 35 to 65 (30 years), and person C saved from 25 to 65 (40 years). Again, they all save $5,000 per year. By the time they are all 65 the final amounts are startling to see. Person A, though only saved for 10 years, would have more money than person B, who saved for 30 years, all because they started saving earlier and the compound interest snowballed. Person C obviously put the most money away, but their final yield at 65 was almost twice that of person A and over double person B.
Saving and investing are never exact sciences because of the volatility of the markets and interest rates, but knowing the facts and planning ahead can go a long way. The main lesson to learn from all this is to begin as early as possible. So if someone is starting a 401k or IRA in their twenties or forties, and wants to ensure they retire with $1 million in it, then following the parameters discussed above, and understanding compound interest, should go a long way in learning how to do just that.
Commentary by Chris Dragicevich