After the pomp and circumstance of this graduation season has ended, new graduates would be wise to turn their attention to the practical matter of retirement savings.
And even though graduates and other young employees might perceive advice-givers as the adult voices in the “Peanuts” cartoons (remember the “mwa, mwa” created by a trombone player?), they should be reminded that saving more, earlier is the best way to achieve peace of mind in retirement.
The Government Accountability Office reports that more than 49 million U.S. workers take advantage of defined contribution plans, such as the 401k, each year. And yet, the balances in many of these accounts are not nearly what they should be.
Because of the effect of compounding interest, the value of a 401k retirement account is greatly affected by not only how much an employee saves but also by the time at which this pre-tax saving begins.
As the following scenarios illustrate, beginning to save as early as possible (ideally with that first paycheck) will make attaining future financial security much easier.
Saving 10 percent of a $40,000 annual salary beginning at 22 ($167 per biweekly paycheck) would result in retirement savings of $571,410 by 65 (assuming a 5 percent return, compounded annually).
Saving just 2 percent more, or 12 percent of a $40,000 annual salary beginning at 22 ($200 per biweekly paycheck) would result in retirement savings of $686,376 by age 65.
Beginning to save 10 years later, at 32, has a significant effect on one’s retirement account balance. Saving 10 percent of a $40,000 annual salary beginning at 32 ($167 per biweekly paycheck) would result in retirement savings of $319,940. That’s $251,470 less than if the savings had begun at age 22.
As careers continue and salaries presumably increase, employees are well advised to continue to put away the same percentage of their salary, thus increasing the retirement account balance scenarios.
But remember, the Internal Revenue Service has set the maximum allowable 401k contribution for those under 50 at $18,000 per year. For those 50 and older, it is $24,000.