In your 20s, retirement is a distant four or five decades down the road. Why worry? You're hustling to make the rent, or save up for a security deposit so you can move on from your parent's home. And maybe there's a student loan to repay.
But two facts should persuade you to be the oddball among your friends who actually starts saving early for retirement. One, unless you're that rare worker covered by a pension, you are 100% on the hook for funding your own retirement.
Two, if you start saving now, taking advantage of the miracle of compounding over 40 years, you'll easily pile up enough to live comfortably in later life (and most people don't achieve that).
Here's how to do it:
-- Save $100 a week from age 25 to 65 and you will have about $1.1 million, assuming a 7% annualized return. Of that $1.1 million, $208,000 will be money you saved. The other $900K or so will have been delivered by compounding. Do your saving in a Roth IRA (or Roth 401(k), if your employer offers one), and that's $1.1 million to spend tax-free in retirement.
-- Wait until age 40 to start saving and you will need to save $300 a week for 25 years to end up with $1.1 million by 65. That works out to you shoveling $390,000 of your own money into your retirement savings.
A quick web search of "periodic investment calculators" will land you at sites where you can fiddle around with your weekly/monthly quarterly investments and the time your money will have to grow. Plug in any expected return. A portfolio of 70% stocks and 30% bonds has returned an annualized 9% since 1928. The more conservative 7% used in the earlier example errs on the safe side.
While you're fiddling, see how starting at $100 a week for a few years and then ratcheting up to $200 a week will sweeten things even more. For example, if you save $100 between 25 and 35 and then save $200 a month until you are 65, you will have $1.7 million at retirement, assuming a 7% annualized return.
Don't have $100 a week to save?
You sure? That's $14 a day. The reality is that if you set up an automated plan to zap money into your retirement account, you will likely find that spending adjusts to that. If you have a workplace retirement plan, you're set (make sure you are saving at least the equivalent of $100 a week).