When it comes to saving for retirement, the single best advice that any financial adviser will give is to start saving early.
According to numbers crunched by investment firm Vanguard, someone who puts aside $150,000 between 25 and 40 will have $1.058 million saved by age 65. Someone who puts aside more ($350,000) but waits until age 35 to start doing so will only have $838,019 saved by age 65.
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Along with starting early, maximizing interest generally requires some level of early sacrifice and forward-thinking — according to another calculation from CNBC, anyone wishing to get $80,000 a year in interest during retirement would need to have $2.6 million saved by 65.
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How Much You Should Be Saving Each Month
This means that a person starting to save at age $25 would need to put away $1,340 a month in retirement savings. To have $90,000 interest a year, the same person would need to put away $1,506 a month.
The calculation is based on the assumption that the saver plans to retire at age 65 and has no money put away at the time they start to save. The portfolio is a standard mix of stocks and bonds that grows more conservative the closer one gets closer to retirement — the practice is commonly recommended by financial advisers and the default option for most employer-funded savings plans.
The average interest rate will be 6% during the working years and 3% during retirement.
Someone who wants $100,000 a year would need to put away $3.3 million between ages 25 and 65 in what averages out to $1,674 a month — as the annual 401(k) contribution limit is $22,500, all of these amount to less than the $1,875 one can put away before taxes each month.
As the early start makes the biggest difference toward those accumulating savings, someone who starts saving later will need to put away significantly more each month to reach the same number — along with being hard to do on an average income, any savings above the 401(k) contribution limit will also need to come after taxes.
How to Capture Compound Interest
While the $80,000 does not take into account inflation or any taxes one will need to pay when taking out retirement savings, having the equivalent of what is an above-the-median salary in 2023 in interest can lead to what is ultimately the ideal retirement situation — living primarily or even entirely off the interest earned from the savings without having to dip into one's main savings sum.
The 6% interest rate is also an average that does not take into account year-to-year fluctuations — while the average 401(k) dropped in value in 2022 amid widespread inflation and war in Europe, this is a conservative estimate for how much one can gain through a decades-long approach to saving.
"Saving money early lets you take advantage of the power of compound interest which means not only do you get returns but you get returns on your returns," CNBC says in its explainer video on the subject. "Getting serious about saving now can be the first step to a stress-free retirement later."
