What Will it Cost if You Delay Saving for Retirement?
May 26, 2011The other day, I have to confess, I was in a very sour mood as I just found out my flight had been delayed (that never happens right?) and I was not going to be home for THREE HOURS. Why did this bug me so much? My wife and I were scheduled to look at some homes as we are still in limbo relocating from California to Chicago. So this three hour delay cost me the ability to view some possible locations and extended our time horizon of not having a home by at least another week. The only redeeming factor here is that this delay was out of my control.
So what in the world does me venting about an airline delay have to do with retirement planning. Simple. I have heard from countless people over the years that there is plenty of time to save for retirement and that they want to enjoy a little now before they buckle down. Well let’s look at an example to see how much the cost of delaying could amount to. First let me throw out some assumptions:
Salary: $45,000
Average annual rate of return: 8%
(For sake of simplicity we will keep these numbers constant throughout the worker’s time span)
First example: Jane, a 23 year old employee who is contributing 5% of her salary and does so each year until age 62. Projected retirement balance at age 62: $602,244
Now consider another 23 year old: Duane. Duane says, “I have time to save. I will start in 4 years when I’m 27.” Twenty seven is still young right? AND Duane would have around $2250 extra to spend each year (since he would not be contributing to his retirement account).
So what’s the trade-off or cost of delaying retirement savings for four years in this example? Considering that Duane would have a projected balance of $430,103 at age 62 his cost of delay was only (sarcasm intentional) $172,141! Sure hope that extra $9,000 he got to spend between 23 and 27 was worth it.
Obviously this example clearly shows that the longer you wait to save the bigger your cost of delay. But it’s not just the monetary cost it is also the delay in actually retiring.
Moral of the story: only let the delays you have be from those outside of your control.