How to Reach Your Retirement Target

Start saving early and let compounding work on your behalf. Otherwise, you may need to stay on the job longer.

Given that you can’t know your final income when you’re still 25, most retirement planners recommend that you save 10% to 15% of your salary in a retirement account, starting from day one. Keep in mind that contributions to a traditional 401(k) or IRA are in pretax dollars. Contributions to a Roth 401(k) or Roth IRA account are not pretax, but the earnings are tax-free and, assuming the account has been open for at least five years, withdrawals in retirement escape tax as well.

One big advantage to starting early is that it lets compounding work on your behalf. Say you’re 25, earning $40,000 a year, and you initially set aside 6% of your salary, building to 12% over the next six years. If you save 12% for the rest of your career, you’ll have amassed $639,236, or 8.7 times your final salary. (The example, from Fidelity, assumes that your investments earn an average return of 5.5%, your company kicks in 3% a year, and you have a final salary of $73,640.) If you wait until age 30 to start saving and follow the same scenario, you’ll end up with about $100,000 less. Procrastinate too long -- say, to age 45 -- and you’ll have to save almost one-third of your salary to arrive at the same amount at 67 as you would have accumulated by starting at 25 and saving only 12%, according to another example from the Center for Retirement Research at Boston College.

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Jane Bennett Clark
Senior Editor, Kiplinger's Personal Finance
The late Jane Bennett Clark, who passed away in March 2017, covered all facets of retirement and wrote a bimonthly column that took a fresh, sometimes provocative look at ways to approach life after a career. She also oversaw the annual Kiplinger rankings for best values in public and private colleges and universities and spearheaded the annual "Best Cities" feature. Clark graduated from Northwestern University.