Saving is Hard, Regardless of Age
I recently had a conversation with a friend who explained she had used an online retirement calculator, and it said she needed $2M to retire. Her reaction:
“How am I going to save $2M?”
The number is not important; yours may be higher or lower. But the sentiment is common. My statement back to her, a bit flippant but not wrong, was “you don’t save $2M, you save maybe $500K, wait for the stock market to rip like it did from 2010-2024, and now you have $2M”.
Retirement is a Time Value of Money Problem
The Time Value of Money (TVM) is the core financial concept that a dollar today is worth more than a dollar tomorrow, primarily because money available now can be invested to earn returns, and grow through compound interest. TVM uses formulas to calculate Present Value (PV) and Future Value (FV) to help individuals and businesses make sound financial decisions.
Future Value Defined
Future Value = (Present Value) * (1 + annual return)^(number of years)
Example: you expect 7% annual real return for 40 years. FV = $1 * (1 + 0.07)^40 = $14.97
Which means each dollar you spend at age 25 would have been worth $14.97 at age 65, in today's (or constant spending value) dollars. (Note that 7% is the long term average real return on the S&P500.)
(Real Return is nominal return minus inflation; dollars of constant value. We discussed real vs nominal returns in our post on Safe Withdrawal Rate; see that for more information.)
Saving Gets Easier as you Make More Money, Right?
You will likely be making more money in the future, so saving IS easier in that sense. But the later you wait, the more you have to save, and the question is whether or not you can save enough more in the time left.
How Much More Are You Likely to Make?
For most people, your real compensation will increase about a factor of 3 from the start of your career (early 20’s) to mid career (around 50). This is what I observed during my career, and is backed up by this ADP report; and that largely holds true across the income scale.
Beyond around age 50, real compensation actually starts to drop for most people. This can be for a number of reasons: people step away from higher pressure roles for quality of life, at that age you are likely working in an aging industry where compensation is lower, etc.
There are some who will break beyond this; most won’t.
Can You Save Enough Later In Life?
Now we know how TVM works, and that we will make around 3x our starting compensation at 50. How does that play out for getting to a given retirement savings versus the number of years of saving?
The chart above shows how a monthly savings of $1K-$5K, compounded at 7% return, for up to 40 years.
I’ve converted the first chart to use a log scale for $, zoom into account balances > $1M, and to add a line showing the $2.5M target.
Critical Idea: Note that as you move from right to left across the $2.5 line, the time between where the savings lines cross the $2.5M is getting shorter and shorter for constant changes in monthly contribution. (The arrows indicating the crossing points are closer together as you move right to left.) What this is saying is that the longer you wait to start saving, the amount you have to save each month is rapidly increasing.
Paths to $2.5M in Retirement
- Save $1000/month - after 40 years you have $2.56M.
- Save $2000/month - after 30 years you have $2.43M.
- Save $4000/month - after 22 years you have $2.52M.
- Save $5000/month - after 20 years you have $2.63M.
That last bullet drives home the Critical Idea above. An extra $1000/month savings reduces the time to $2.5M from 40 years to 30, but it also takes $1000/month more to reduce the time from 22 years to 20 years.
Saving Gets Harder The Longer You Wait.
Which seems easier:
- Save $1000/month starting early in your career.
- Save $5000/month starting mid-career.
Given that most people will only be making about 3X their early compensation when they reach mid-career, saving 5X seems much more difficult.
This is the result of TVM. Those early dollars saved generated free money.
How Much of the $2.5M Did You Save?
Another way to look at this is to determine how much of the final $2.5M came from your contributions to savings, versus how much was a result of investment returns.
- At the $1000/month for 40 years, you contributed $480K of the $2.5M.
- At the $5000/month for 20 years, you contributed $1.2M of the $2.5M.
Delaying Saving Makes it Harder
- $1 today is worth much more in the future: $3.9 (20 years), $7.6 (30 years), and $14.9 (40 years) with 7% real return
- You will likely be earning more mid-career than early career, by about 3x.
- However, due to TVM, if you delay saving for retirement you will have to save a significantly larger portion of your income to reach your goal.
While it is possible you will be someone who breaks way above the typical 3x mid-career compensation level, most won’t. Regardless of what people say, most don’t win in Vegas. Hope for the best, plan for the worst.
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View Video Transcript
All right, let's dive into a big one. We're going to talk about an idea that feels so right, so logical, but can be so, so wrong. It's that thought that, you know, I'll just wait to save for retirement. I'll do it when I'm older and making more money. Today, we're going to see if the math actually backs that up. We've all been there, right? You punch your numbers into one of those online retirement calculators and it spits out this huge, terrifying number and you just think, $2 million? How on earth am I supposed to do that? It's it's completely overwhelming and it makes kicking that can down the road feel really, really good. And that feeling, that's the heart of the I'll save later myth. The whole idea is simple. You think, "Hey, my career is going to take off. My salary will go up." and saving a big chunk of cash will be way easier then than it is for me right now. I mean, it makes sense on the surface, doesn't it? Of course, it's easier to save when you have more money coming in. But today, we're going to put that logic to the test. We're going to ask the big question. Is it really true? Does the math actually work out? To find that answer, we first have to understand money's secret power. It's this incredible force that's always working in the background. And frankly, it is the biggest enemy of the whole I'll save later strategy. And that secret power, it's called the time value of money. All it really means is that a dollar today is worth way more than a dollar in the future. Why? Well, because that dollar you have right now can be put to work. It can be invested. It can start earning returns. And then here's the magic part. Those returns start earning their own returns. That's compounding. And it's the engine that grows your wealth. Let's just see how this works. Let's make it real. Imagine you invest one single dollar. That's it. Just a buck today. Okay. Now, fast forward 20 years. Assuming a pretty standard 7% real return. That's your growth after inflation is taken out. That $1 has turned into almost $4. Pretty good, right? But wait, let's go just 10 more years into the future. Look at this. It's more than doubled again. It's now worth over $7.50. You can start to see how the growth is picking up speed. And after 40 years, that one single dollar you started with is now worth nearly $15. So think about that. Every dollar you don't save early on is a potential $15 you're just leaving on the table. Okay. Okay. But I can hear you saying, "What about my future paycheck?" Let's talk about the part of the myth that feels so right. The fact that you're going to make more money later. And you're not wrong about that. The data is pretty clear. For most of us, our real compensation, that's your salary after you account for inflation, will typically triple from when we start our careers to when we hit our peak earning years around age 50. So, we've got our two contenders in a race. In one lane, you've got your income, which is going to triple, and in the other lane, you've got the ticking clock of compounding interest. So, who wins? Let's look at the data. So, this chart shows how savings can grow over 40 years. You see how it starts out kind of flat and then just skyrockets up at the end? That's what we call the J curve of compounding. And the really wild thing here is that the most explosive, most powerful growth happens in just those last 10 or 15 years. Now, this next chart helps us zoom in on that path to our $2.5 million goal. The arrows show when different savings plans hit that target. And look closely. See how the gaps between the arrows get smaller as you move from right to left? That's a huge clue. It's telling us that to reach your goal just a little bit sooner, you have to save a lot more money each month. You know what? Let's just break this down into a simple table. So, to hit that goal, you could save a,000 bucks a month for 40 years. But if you wait 10 years, you got to double it to $2,000 a month. Okay, fine. But if you wait 20 years, you don't just double it again. You have to jump all the way to $5,000 a month. The amount you need to save is accelerating way faster than time is passing. So, let's bring it all together. Let's deliver the final verdict on the save later myth by just doing some really simple math. So, here's that race we were talking about side by side. If you start early with your 1x income, you need to save a,000 bucks a month. If you wait until mid-career, yes, your income is three times higher. But to hit the same goal in half the time, your required savings have gone up by five times. And this chart shows you exactly why. If you start early, saving that $1,000 a month for 40 years, you only have to put in about $480,000 of your own money. The other 81%, that's over $2 million. That's basically free money generated by the market. Time does almost all of the heavy lifting for you. Now, look at the person who waited. To get to that same $2.5 million, they have to personally shovel in $1.2 million. They're doing almost half of the work all by themselves because they gave up all those precious early years of compounding. The market just doesn't have enough time to help them out. And there it is. That's the knockout punch to the I'll save later myth. Yes, your income will probably triple, but to catch up, the amount you'll need to save will grow by five times. Your salary just can't win a race against the power of lost time. The math is just it's clear. Waiting for a bigger paycheck to start saving is a losing game. It might feel easier today, but you are making your future so much harder, exponentially harder. So the only real question left is how are you going to pay your future self?