Turning a quarter-century old can feel like a big milestone, but it's significant for a financial reason, too. Young adults need to start regularly saving by age 25 to have a least $1 million to retire on, according to a new report by the Milken Institute.
The reason: the simple effect of compounding returns. The Milken Institute calculates that a weekly $100 investment in the stock market, earning a 7% annual rate of return, will over time compound into savings that top $1.1 million by age 65.
The message comes at a tough time for many younger savers with the restart of federal student loan payments in October. Setting aside $400 a month can be a challenge for savers of all ages. Needing to do so when one in five student-loan borrowers will need to pay at least $500 a month to service their debt, could make saving for retirement look even more daunting.
Twenty five is the age Fidelity Investments and other financial service companies often use when offering guidelines around how much money one should aspire to save for retirement by a certain age. Fidelity’s projections assume savers will start investing 15% of their pre-tax income (that includes any employer match to a 401(k) account) at age 25 with about half of that invested in stocks on average, allowing them to retire at age 67.
At age 30, Fidelity figures savers need to have amassed one year’s worth of pre-retirement income to be on track. By age 60, it’s eight times, and at 67, workers should have ideally saved 10 times what they were making before retiring in order to maintain their lifestyle when paychecks stop rolling in.
Hard as it can be to do while juggling competing priorities, starting to save early has a powerful mathematical logic to it. If savers waited to start putting away $100 a week until age 35, they’d have slightly more than $300,000 by age 65, according to the report.
This article was provided by Bloomberg News.