Are you having trouble finding the money to cover your rent these days? What about groceries? No matter your household size or location, it’s gotten very expensive to live across the board. We can thank our friend inflation for that. So it’s understandable if you’re on a tight budget — one that doesn’t leave you with much room for retirement plan contributions.
The bad news is that if you don’t manage to save for retirement, you might end up pretty cash-strapped later in life. The average retired worker on Social Security today only collects about $23,000 per year. If that doesn’t sound like a sum you can live on reasonably, then you’ll need to push yourself to come up with some money for your IRA or 401(k).
The good news, though, is that if you can save $1,000 a year, or $83 a month, you can build up a nice nest egg over time. But you’ll need to start early and invest your money wisely to turn $83 a month into enough cash to retire on.
Running the numbers
If you contribute $83 a month, or $1,000 a year, toward retirement over a 40-year period, you’ll be putting in $40,000. That itself is not enough to retire on. On the other hand, if you invest your money in the stock market during that time, you might manage to grow your $83 a month into an impressive amount of money.
Over the past 50 years, the stock market’s average annual return has been 10%. This accounts for years when the market performed well and when it slid. If you invest your retirement savings over a 40-year period, there’s a good chance you’ll manage to score that same return in your IRA or 401(k), too.
If that’s the case, then contributing $83 a month over 40 years leaves you with about $441,000. That might seem like it’s too good to be true. But the reason is that each year you invest money in stocks, it grows a bit. Then, you get to reinvest your gains as well. Over time, you can turn a bunch of small IRA or 401(k) contributions into a lot of money.
For context, the median retirement savings balance among Americans 65 to 74 today is $200,000, according to the Federal Reserve. So if you were to retire with $441,000, you’d have more than double the median balance.
Start saving for retirement as soon as you can
You can retire on $83 a month if you have a long savings window ahead of you, and if you’re willing to invest in stocks for strong returns. But if you’re halfway through your career and haven’t started to save yet, $83 a month may not cut it.
If we narrow your savings window to 20 years, even with a 10% return, $83 a month will only leave you with $57,000. That’s probably not enough money to last throughout retirement. But if you start early enough, $83 a month could have a huge impact.
So if you’re in your 20s and are having trouble pushing yourself to fund an IRA or 401(k), ask yourself this: Would you rather part with $83 a month now, or a much larger amount per month in the future to make up for lost time? If the former sounds better, then do what you can to work retirement plan contributions into your budget immediately.
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