The Question: To Save or Not to Save

“If I knew I’d live this long, I’d have taken better care of myself.”  Regrets  become familiar as we go through life.  A regret that we often hear is, “I wish I would have started saving and investing when I was young, just think what I’d have saved now for retirement!”  Time is on our side when we’re young, not so much as we near retirement.

Many companies and government agencies have retirement savings plans (401k, 403b, 457, TSP, etc.) to help their employees save for retirement.  How many of us take sufficient advantage of these plans?  Not enough according to the Employment Benefit Research Institute’s (EBRI) annual survey on retirement readiness.  One of the most disturbing statistics is that less than one in four (25%) of households, where the head of household is age 55 to 64, has saved $250,000 or more for retirement.  Less than one in four!  No wonder so many people are concerned as they near retirement.  

What could one save if they participated consistently in their company’s retirement savings plan?  To answer this question we looked at what could happen if one used the retirement savings plan at the Boeing Company to save for retirement.  The example is hypothetical but not unrealistic.  The assumptions are:

• The person starts saving at age 25
• The person’s starting salary is $40,000 per year and increases by 2% per year
• The person saves 8% of her salary and receives a 6% company match
• The portfolio return is 8% per year
• The person works & saves for 30 years (to age 55)
• The person follows a consistent investment policy (no market timing)

The following table illustrates how much one could save in 30 years.

By saving just $123 per 2-week pay period (increasing that amount by the annual 2% salary increase) a person could have accumulated over $800,000 over a 30 year career!  This is especially significant because less than 25% of all households save $250,000 or more.  Keep in mind that these exceptional results were obtained through a simple process.  Consistently saving, in the organizations' retirement plan, and receiving the company match, is the key to reaching a significant amount of money as you near retirement.  

Someone (and it probably wasn’t Einstein) said that compound interest is the 8th Wonder of the World.  Looking at the Portfolio Value column shows us what he meant.  It takes 10 to 11 years for the portfolio to grow to $100,000.  The growth of your money during that first decade seems grindingly slow and can cause many to give up and cash out their retirement savings.  Big mistake!  If they can ignore the impulse to quit saving, and stick with it throughout the second decade, they could accumulate $320,000 for retirement.  Remember the dismal fact that less than 25% of households save even $250,000?  The now 45 year old employee has blown past that threshold.  Look at years 21 through 30.  This is where the miracle of compound interest produces the most astounding result.

Given this information, doesn’t everyone save at least enough to get the full company match?  According to Boeing, eligible retirement plan participants left $98 million in retirement savings on the table in 2013.

So why don’t young people save early?  It’s hard for many people to think long-term when there are so many “urgent” spending needs.  A person works so hard to pay everyone else, why not pay yourself $61.50 per week first?