If Not Now… When?

Piggy bank

2014-01-20 Winston Churchill

On my last day of work (December 31, 2013), I said goodbye to a few of my colleagues who sat in the cubicles around me.  In addition to the well-wishes and expressions of how nice it was to work together (and it was – they are wonderful people), several people made comments about how they envied me for being able to retire, especially at the relatively young age of 56.

One young lady, who was only about 2½ years out of college, said she hoped she would be able to retire young.  I asked her if she had started saving for her retirement.  She hesitated and said, “Well…  I’m trying to save money for a down payment on a house.”

That’s a laudable goal, and I’m glad she’s saving money for something.  This wasn’t the time or the place for continuing a discussion on that topic, nor did she ask for my advice, so I let it go.  But I’ve thought about this brief exchange several times since then.

Perhaps this young lady plans to start saving for retirement after she saves enough for her down payment.  But then, there will be furniture, kitchen appliances, curtains, décor, and all kinds of other things to buy.  Plus, when people buy houses, they tend to choose a house that’s at the upper limit of what they can afford at that point in time.  They figure that raises in subsequent years will effectively reduce the percentage of their budget that’s going towards their house payment.

Then there will be a new car to buy and vacations to take.  If she has children in the future, that will represent a significant additional expenditure for at least a couple more decades.

One of the main reasons I’m able to retire at this time is that I started saving for it on my first day of my first job out of college. 

I started my income-earning career by having 10% of my pay going directly into my employer’s 401(k) plan.  That way, I immediately calibrated all of my spending decisions based upon only 90% of what I actually made. Whenever I bought a house or a car, I figured how much I could afford based upon the 90%.  I never saw that 10%, and I didn’t miss it.

In later years, I increased that percentage to 12%.  When I worked for companies that offered stock purchase plans, I participated in those to the maximum extent possible.  When I had other financial windfalls, such as a small inheritance or profit from the sale of a house, I invested most of the proceeds.

After I maxed out the amount I could contribute to my 401(k) each year, my financial advisor recommended other investments (outside my retirement accounts) and set up automatic withdrawals from my bank account each month.  That money, plus my company stock, is money that I can tap into before age 59½, which enabled me to retire a few years early.

If you are self-employed or your employer doesn’t offer a retirement savings plan, you’ll have to do it on your own.

It will take a little more discipline and commitment, but it can be done.  You can open an IRA or Roth IRA and have regular monthly payments taken out of your bank account, just like you do for your automatic bill paying.

I’m not a professional financial advisor, and I wholeheartedly recommend that you use one.  This is just my own experience; although it echoes good advice I’ve heard and read from numerous sources.

If you start saving 10% in your early- to mid-twenties, and if you invest primarily in a diversified mix of stock mutual funds, you have a good chance of accumulating a sufficient amount of money to retire.  Not only are you saving more money, but that money has the most years to grow and compound, and you’ll be better able to weather the bear markets along with the bulls.

If you wait until your mid-thirties, you’ll have to start saving at least 15% to yield the same result.  And if you’ve been in the habit of saving little to nothing up to that point, it will be difficult to find room for a 15% contribution.

If you wait until your mid-forties, you’ll have to start saving at least 20%, which will be a huge adjustment to make.  Plus, you’ll be more at the mercy of how the market performs over a shorter span of years.

So my advice to my young colleague would have been to start putting 10% towards her retirement first. 

It may take her a little longer to amass her down payment, but that money she saves today will be the most powerful, because it will have the most years to grow.

More important, it gets her into the savings habit early, before she has house payments and expenses, when it’s the easiest.  She will never miss that 10%.

As I tell people in my workshop, if you’re now older and you didn’t start saving 10% back in your twenties, don’t give up all hope.  Start now!  Start by doing what you can.  If you can only save 5% now, get started with that.  Each year, increase it by 1-2%.  Look for ways to reduce spending in other areas.

Your mountain may be steeper to climb at this point, but each step will take you closer.

©2014 Dave Hughes.  All rights reserved.

Photo credit:  401(K) 2012.  Some rights reserved.


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