Not necessarily. Actually, it depends on your definition of ‘hard.’ I began a 401K and pension fund when I was hired on at my company 24 years ago. Today, I have a nice retirement. But that was just my individual case and I’m sure your circumstance is far different. So let’s focus on you, instead. Whether you’re twenty or forty, you have to make a tough decision. You have to do without something now to benefit later. In other words, you have to save money now, and that means sacrifice.
The younger you are, the less you have to give up. That’s because your savings multiplies faster over a longer term. Hence, you can put aside a small amount and watch it grow using the magic of compound interest. Assuming that you can get a 5% return on an average investment, we can run a simple chart. That return is based on most common tables that are not tied to equities or bond funds. Although most experts would agree either should generate that type of return. Even guaranteed CD’s, or certificates of deposits, backed by FDIC for safety sake, can offer similar rates. But whatever device you choose, let’s use that number.
So let’s look at one example. Suppose you are 25 years old and make $10 an hour or $400 a week or $1600 a month. After taxes that’s about $1200 monthly. I want just $150 of that, for your monthly investment. Figure that if you were to give up a Starbucks coffee costing $5 every day, there’s your $150 a month. Do that for the next 40 years and you’ve given me $72,000. But, by investing the monthly amount in a 5% returning account, the compound interest turns this into $228,900 by age 65. Not bad for someone doing without a Vente Café Mocha Latte every day. Now, as you make more with raises, job changes, etc., and you could quadruple that investment, you’ve got over $1,000,000 for retirement.
But I’ve got an even better plan. Could you squirrel away $5,000 for that first year? I know that’s a lot to ask, but hear me out. If you could manage to put aside $10,000 over two years and invest it, never putting in another dime, you won’t be able to guess what you would amass after 40 years. $50,000! But, if you could somehow get a 10% return instead, investing the same $10,000 for 40 years we would make you about $500,000! That is an example of how the interest rate affects the return. And there are ways to generate a 10% return using equities or mortgages. I suggest you talk to an investment adviser for that information.
The great advantage of this plan is you: (a) didn’t have to give up much, (b) don’t have to be an investment wizard, (c) let time and compound interest work for you, and (d) can look forward to a healthy retirement. Of course, the more you’re willing to give up now, the greater the end result. But working harder isn’t the answer: it’s saving smarter and earlier. Therefore, if you’re in your twenties and figure retirement is decades away, you’re right and that can work in your favor. So start planning now and the rest will take care of itself. Savings for retirement is hard? Myth busted!
