Compound interest can boost the growth of even the smallest investments
We’ve all heard it before: start planning for retirement when you’re young. But what if circumstances have forced you to wait? Is there no hope? The answer is a resounding no. Here are three reasons why it’s never too late to start planning for the day you bid farewell to your job.
1. Compound interest works regardless of your age
Some people start saving for retirement as soon as they enter the workforce, benefiting from the magic of compound interest over a long period. However, starting early is not the only path to success. Compound interest can still work in your favor, no matter when you begin.
Let's assume you're 55, aim to retire in 10 years, and have no retirement savings yet. While this isn't ideal, it is not insurmountable. As personal finance experts often say, "The best time to plan for retirement was years ago. The second-best time is today."
Let's assume you start contributing $100 a week to a retirement plan, such as a company plan or an individual IRA.
Historically, the average annual return on the S&P 500 since 1928 has been 7.7%. Although returns vary from year to year, let's assume an average return of 7% over the next 10 years.
By investing $5,200 annually ($100 weekly), you would have nearly $72,000 saved by age 65. Without compound interest, this total would be $52,000 ($5,200 per year times 10). However, thanks to compound interest, your investment grows significantly by an additional $20,000.
2. Take advantage of "catch-up" contributions as you get older
As you get older, you become eligible for "catch-up" contributions, which allow you to contribute more to your retirement plan. For example, in 2024, the standard contribution limit for a 401(k) plan is $23,000. However, if you are 50 or older by the end of the calendar year, you can make an additional catch-up contribution of up to $7,500. This means you can contribute up to $30,500 annually to the following plans:
401(k) (excluding SIMPLE 401(k))
403(b)
SARSEP
Government 457(b)
Even if you think contributing more is beyond your reach, every extra dollar you add to your retirement savings brings you closer to your goals.
Remember, you don't have to withdraw all your retirement funds at once. You can take only the required minimum distribution (RMD) and allow the rest of your funds to stay invested and continue growing.
3. You have a clearer picture of your guaranteed income
Guaranteed income refers to reliable sources of income you can depend on monthly, such as pensions, Social Security payments, and annuities. The Social Security Administration (SSA) calculates your monthly benefits based on your "average indexed monthly earnings" over your 35 highest-earning years.
Typically, the older you are, the more work history you have, and the more accurate the SSA's estimate of your future benefits will be.
Why is this important? Knowing how much guaranteed income you will receive each month makes it easier to create a realistic budget. You can register at my Social Security to get an estimate of your expected benefits.
Although the estimate isn't exact, it's close enough to help you determine if your projected income will meet your needs or if you need to adjust your plans. For instance, you might choose to work longer, take on a side hustle, or downsize your living situation in retirement.
The bottom line
If you're inclined to think in all-or-nothing terms, starting to save for retirement later in life might seem daunting. However, every dollar you save now will help make your retirement years more comfortable.
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