Financial Retirement Planning for 30-Somethings

The savings rate among Americans is at the lowest rate since 1933.  In other words, we aren’t saving for our financial future and younger workers are among some of the least prepared for retirement and future financial matters.  The average worker between 25-35 years of age has less than $6,000 in their 401(k) account according to figures recently released by the Principal Financial Group.  These young workers who can gain the most advantage to utilizing a 401(k) account are taking the least advantage of it.  They are unaware how the power of compounding interest can help them build up a substantial retirement account by taking advantage of the many working years ahead of them.

Let’s take a look at how a 30-year old worker can build a substantial portfolio by starting early instead of waiting until the age of 40 to begin contributions to a company-sponsored 401(k) plan.  For our example we will assume that the annual rate of return is 8%, an average salary of $40,000, our sample employee is putting away 10% of his paycheck towards retirement, a 50% company match and an annual raise of 5%.

At the end of 35 years you will have amassed a portfolio with a value of $2,046,417.02.  The same 40 year old worker will only have saved $ 750,813.41 – less than half than that of a the 30 year old!  In fact, to match the portfolio value of the 30 year old the 40 year old would have to put away nearly 38% of his annual salary!  That’s the power of compounding interest in real-life figures.

Of course, there is also the tax savings associated with a 401(k) account that should be taken into consideration.  401(k) contributions are tax-free, in other words Uncle Sam doesn’t get a cut of the money – it’s like giving yourself a raise!  You are taxed on withdrawals from you 401(k) account which happens after retirement when you presumably will be earning less per year than when you were working.

If that isn’t enough to convince you to start savings then how about this:  by not contributing to your 401(k) you are turning down part of your annual benefits package.  Because most companies match employee contributions (usually between 25 to 50 cents on the dollar) you are actually leaving money on the table that the company is willing to give you for free to build your retirement portfolio.  If you contribute $8,000 a year and your company matches it at the rate of 50% then that is $4,000 extra that is added to your total benefits package.  Who in their right mind would turn down free money?  Plus, with the power of compounding interest that $4,000 can quickly turn into tens of thousands of dollars – all yours for the taking.

In our society we tend to just look at the here and now and don’t put much thought into retirement.  By the time most people start thinking about it there simply is not way they can amass enough money to retire on in the time left.  The end result is they end up working beyond normal retirement age or find they have to lower their standards of living after retirement.

So start saving while you are young, even if it is just a 1% contribution - make sure that you are contributing at least something.  In fact I want you to take the one-year challenge.  For one year I want you to contribute at least 5% of your salary to your 401(k).  At the end of the year review your statement and see how you did.  Now, you didn’t miss that 5% so do it for another year, then another.  Trick yourself into savings!

Retirement planning is a lifelong process, and one that need to be started as soon as possible to get the maximum benefit out of the power of compounding interest.