Why time may be your retirement strategy’s BFF

In my last post, I talked about how 70% of American workers will fund their own retirement1, primarily through employer-sponsored defined contribution plans like 401(k) and 403(b) plans. What you may not be fully aware of is what this means to us as women.

Time is truly your best friend when saving for long-term goals. The earlier you start the greater the potential to reach your goals.Because we are living longer than ever before, a 65-year-old woman today can expect to live, on average, another 20 years. In fact, current trends suggest that 12% of women who reach age 65 will live to be 952. (I just completed an on-line tool that gave me my estimated life expectancy of 91!)

Until recently, financial advisors estimated that most retirees would need 80% of their pre-retirement income for each year in retirement. But with increases in longevity and escalating health care costs, many are raising that recommendation to 100% of pre-retirement income for women.

That may seem like a lot but I know from personal experience how quickly circumstances can change in retirement. My experience with my mother who was diagnosed with Alzheimer’s and eventually required long-term care provided invaluable first-hand knowledge. Her monthly expenses in retirement more than doubled once she required round the clock care in a nursing home. It’s not something we want to think about in terms of our own futures, but this may be a reality for many of us.

The good news is that while we can’t predict the future, we do have the ability to plan for certain scenarios or potential outcomes. The best case scenario is usually when you begin saving as early as possible. I’ve included an example here that I find particularly powerful, using “Jennifer” and “Valerie” to illustrate what an extraordinary impact saving early can have over time.

Jennifer began saving $500 a year at age 22. When she turned 30, she stopped contributing to her savings account but left the full amount in the account until she retired at age 65. She contributed a total of $4,500 over that 9 year period.

Valerie didn’t begin saving until she was 40-years-old. She also saved $500 a year. Valerie saved the same amount annually for a period of 26 years for a total of $13,000.

To keep things simple, both women in my example earned a hypothetical 6% return over the time their monies were invested. By age 65, Valerie’s account value was $33,628, more than double her $13,000 in contributions. Jennifer, on the other hand, saw her account value grow to $53,303, or nearly 12 times the amount she invested over the course of 9 years.

That’s the power of compounding. It’s more about how long you save it than how much you save. Because earnings in this hypothetical example compounded over the 43 year period from when Jennifer made her initial investment at age 22, and she did not withdraw money from her savings, she realized exponential growth. Valerie also realized significant growth through the power of compounding but did not have the amount of time on her side that Jennifer did.

Time is truly your best friend when saving for long-term goals. The earlier you start the greater the potential to reach your goals. Time can also help you ride out market volatility which is why financial advisors generally recommend that younger people, 10 years or more from retirement, consider a more aggressive allocation than people nearing or in retirement.

When it comes to retirement planning, time is not just your friend, it can be your BFF.

I’d like to hear your thoughts on the hypothetical example provided. Did it surprise you that Jennifer saved for only 9 years, yet realized an account value more than double Valerie’s? Does this example inspire you to begin saving now or to begin saving more?

Calculations used in the example are for illustrative purposes only. They are based on hypothetical rates of return and do not represent investment in any specific product. They may not be used to predict or project investment performance. Unless noted, charges and expenses that would be associated with an actual investment are not reflected.

1McKinsey & Company, 2011.

2National Women’s Law Center

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