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.
If you’re well into midlife and never got the memo to save early and often, “worry about how long to work rather than how much you save,” says Alicia Munnell, of the Center for Retirement Research. By working even a few years extra, you not only keep money coming in and your savings growing, but you also reduce the number of years in which you need to tap your nest egg. More important, Social Security benefits increase by about 8% a year for each year you delay claiming benefits between age 62 and 70. For example, if you start saving at 45, you’d have to set aside a whopping two-thirds of your salary annually to get to a sum that replaces 80% of your income at a retirement age of 62, according to the Center for Retirement Research. Start at 45 and retire at 70 and you’d have to save only 18% -- still stiff but more doable.
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