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It’s (almost) never too late to save for retirement

By Barbara Whelehan ·
Friday, April 23, 2010
Posted: 2 pm ET

You've heard about the magic of compounding. That only works if you have decades to let your savings proliferate like wild rabbits. So if you're way past age 30 and you haven't begun saving for retirement, you might be discouraged to the point of giving up.

It's not the end of the world. You still have time. In fact, an article in the spring issue of the T. Rowe Price Report reveals that even if you're 55 years old and haven't saved a nickel, it's possible to accumulate more than $400,000 in 10 years.

Hey, that's more than you'll ever find rummaging through your couch cushions.

What's the catch?

Unless you're raking in the dough, you'll have to contribute a large percentage of your earnings to your 401(k) or other retirement fund.

For example, if at 55 you earn $80,000 and maximize your contributions for all 10 years, you can amass $444,610, assuming annual returns of 8 percent, a 3 percent company match and 3 percent annual salary increases.

That would involve deferring 27.5 percent of your income the first year, or $22,000, the maximum amount you can stash in your defined contribution plan if you're 50 or better. That amount includes a "catch-up" contribution of $5,500. (The ceiling for those under 50 is $16,500.)

Using the above assumptions, you'd have roughly $50,000, after taxes, to use toward present day expenses. Of course, the picture darkens if you're earning less than that.

Nobody said it would be easy. But it's possible.

The graphic below, courtesy of T. Rowe Price, shows how much you could amass using one of five savings strategies if you're in your mid-50s. As you can see, you can accumulate serious money even if you make use of the catch-up contributions for only a few years. But if your time horizon is 10 years and you put away just 6 percent a year -- a common deferral amount among employees wishing to take advantage of a company match -- you may be disappointed with the results.

Bankrate's story, "7 ways to stretch your retirement income," uses different assumptions to illustrate the power of maximizing catch-up contributions. It assumes you began deferring 7.5 percent annually at age 35 (at which point you earned $40,000). With 3 percent annual pay increases, you'd be earning $62,320 by age 50. If at that point you maximize your contribution level for 15 years, by age 65 you'll have $719,517 saved up, assuming a 6 percent annualized return.

Everybody's situation is different, and it's not always easy to see whether you need to pick up the savings pace. "How to tell if you're on track" may help.

If you're deferring a gigantic percentage of your paycheck in your retirement plan, share your story. What are you giving up? Do you think it's worth it?

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Barbara Whelehan
April 27, 2010 at 9:33 am

Thanks for your comment, John. It's true the article I cited uses best-case-scenario variables. We'd all be better off if we started saving in our early 20s, like Alex (see other comment), who has managed to save $15,000 while most people his age are finishing college with a boatload of student loan debt. But I think the article by T. Rowe Price does offer hope, and if it inspires someone to start saving at age 55, even if they end up with half the projected amount, they'll be a lot better off than if they have nothing....

April 27, 2010 at 9:05 am

$80,000 yearly salary?
8% annual return in the market?
3% annual salary increases?

The median income in the U.S. (as of the 2005 census) for a single person is $46,000.

The median income in the U.S. for DUAL earners is $67,000.

The Vanguard Total Stock Market Fund returned 3.5% for the last ten years. The S&P 500 index returned 2.9%, or 0% after inflation.

Only those not impacted by outsourcing and contracted hiring at companies willing to part with money can expect to see raises matching inflation increases.

The reality for most working Americans is that if you're deferring a gigantic part of your paycheck, what you are most likely giving up is food, living in a decent neighborhood, and the basics. Start with a high enough number and deferring large parts of your paycheck doesn't look painful at all. Start with a realistic number and it gets ugly quickly.

I'm all for giving people hope and looking on the bright side but it sure would be nice to see these articles using more "realistic" data to make these arguments.

Alex F.
April 25, 2010 at 4:33 am

I'm 23 years old and have amassed a retirement savings of about $15,000 between a 401(k) through my employer and a Roth IRA I started when I was a teenager. I now am deferring 12% of my salary (about $70K/yr) toward my 401(k) and hope to continue contributing to my Roth once I have paid down some of my student debt.

I am very thankful for having a "savings mind" instilled into my by an Aunt as I was growing up. I don't feel that I have to sacrifice, per se, in order to save for retirement. The tax benefits are amazing, and I love seeing my nest egg grow every quarter. Seeing my father(about 60) working hard and not having a sizable retirement scares me to death. My mother's plan for him: to never stop working. I don't ever want to be in that situation, and I love helping other people my age figure out their finances. Last week I helped a coworker set up her 401(k) and forced her to save 10%. I told her to buy one less Gucci handbag per month so she can retire someday :)

Bob S.
April 23, 2010 at 4:38 pm

For years, I have lived well below my means and have saved a boatload of cash. Anybody can do it. People who complain that they won't be able to retire are simply too lazy or too undisciplined. No excuses!