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?