How Do I Save For Retirement? – Part 2 of 3

As we mentioned in Part 1 of this series, setting aside a small amount now (like 3%) to work for you over time means when you reach that point, you would be sitting on a six-figure retirement fund.But let’s look at what that really means…

We’re going to assume a few things to make the math easy: 

1. You start a job making $11/hr and never get a raise or a better job (you’re awesome, so that is unlikely, but just go with it to keep things simple). 
2. You get an annual return of 8% on your retirement account (historically it’s been more like 11-15%, but again, let’s be cautious). 
3. Your employer matches your contribution (many do), say up to 3% of your total pay.

Okay, if you start contributing 3% per paycheck at the age of 20 (your employer matches, so your total contribution is actually 6%)– this money isn’t taken from you… you are investing this money in the stock market. Yes, the market has ups and downs, but over time the average is steady growth. Even when there are big dips that look like huge losses on paper, such as recessions, the market typically fully recovers and is keeps climbing like nothing happened within 3-5 years. What that means for you is…

What Retirement Looks Like

At $11 per hour, you make roughly a little more than $22,000 per year. 

When you retire at 60, you will have invested a total of about $25,000, but your account will be worth more than $300,000. 

At this point, your annual return ($300K x 8%) is $24,000. You can leave your $300,000 alone, retire, just live on the annual returns and you’ve given yourself a $2,000 per year raise. 

Or, you could keep working, withdraw the returns each year, and now you’re bringing in ($22k salary + $24k returns) $46,000 per year. Just for being patient with a little money, you’ve given yourself a 110% raise!

Of course, if you get a raise, then your 3% ends up being a bigger contribution. The more you contribute, the bigger your retirement fund is at maturity. If you had been making $15 per hour on day 1, you’re looking at closer to $450,000. That gets you $36,000 in annual returns to live on.

60 Seems So Far Away… 

And, in some senses, it is. But, at the same time, 3% isn’t very much. It’s $3 out of every $100 you earn– the cost of a fast food cheeseburger. Think about that: a cheeseburger out of every $100 you earn ends up being worth $300,000. Another way to look at it: NOT eating 1 cheeseburger for every $100 you earn means you’ll eventually get $24,000 per year without having to work. 

But it does take patience. It doesn’t start out growing very fast. By the time you reach 40- the halfway point– you won’t even be at $100,000 yet. But, it grows faster every year. 

This Is Simply Your Safety Net

Basically, at $11/hr, $13 per week is insurance that you will have the money you need to survive past 60. It isn’t going to make you wealthy right now, but it should provide the sense of safety that you will have the means to provide for your future self. This is one of the tools the rich use to protect and grow their wealth. And now that more and more employers offer it, you can use it, too. 

But it’s only one part. In Part 3 we’ll take a look at some of those tools and how you can use them to plan not only your retirement, but for a better life as you work your way toward retirement.