I just turned 24 and just passed the one year mark at my first job making 26.50/hr with an expected raise/promotion coming in later this month. I’ve been fortunate enough to stay at home after graduating, and have spent the last year aggressively paying off my debt (I’m now debt free) and investing as much as I can in my tax advantaged accounts. I now have ~37,000 in my retirement accounts
The other day I was doing some calculations looking towards retirement. I was shocked to see that if I got to 100,000 by age 30, I could have 1,000,000 by 65 to retire without adding a single penny. Even more shocking was that it is totally doable. Even if I plan to move out in 1-2 years, as moving forward I would only need to invest 10,000 each year over 5 years (I will be in school for a year next year) to hit 100,000 by 30.
My question I guess is, am I missing something? Or has this past year of aggressive saving set me up for lots of financial flexibility. Do I need to be maxing out my tax advantaged accounts in my 30s? Currently, I’m thinking after I hit the 100,000 I could just put in enough money into 401k for company match and that should put me well above 1 million. And the rest of my money can be reconfigured for personal spending/saving for other big life purchases when that picture becomes more clear.
If I’m young is it really that easy?
byu/What_up_bro inpersonalfinance
Posted by What_up_bro
20 Comments
What you might be missing is that $1,000,000 isn’t that much money over several decades. If you want that $1M to last 30 years, you will only be able to withdraw $40k/yr starting at 65. Will that be enough?
> My question I guess is, am I missing something?
Welcome to the beauty of compound returns! $100K -> $1M in 35 years is assuming a 7% annual return, which has historically been achieved (in fact, surpassed), by investing in the stock market. So the one thing I’d ensure is that you’re actually investing the money, not keeping it in some low-interest CD, money market, or similar cash-like holdings.
Other than that, I’d say keep plugging away at saving in tax-advantaged retirement accounts. $1M in 35 years won’t be as much as it might seem today given constant inflation.
Your analysis is Based on past returns; anything can happen in the future.
I also have a strong feeling the next 40 years are going to be nothing like the past 40 years. Do research, stay informed, and don’t slow down.
Yes, time is the most helpful thing when planning for retirement.
Yes it’s that easy. Compound interest is an incredibly powerful thing.
The more you save and the earlier you save it the more options you will have later in life. Yes, you could grind hard for the next five years and then coast to a reasonable retirement at 65 but you could also continue to contribute and have the option of retiring in your 40’s instead. Or choose a middle ground and retire in your 50’s. Or keep contributing hard and retire at 70 in the 1%.
Don’t even try to guess which makes sense for you yet. Just know that if you don’t save now then future you won’t get to make that choice later.
It is simple, but it isn’t easy. If it were easy everybody would be doing it.
They say that the first hardest part is getting to $100,000. The next hardest part is getting to a million. I can tell you from my experience both of those things are true. But once they happen you will see very quickly the benefit to both.
Yes, it’s the magic of compounding. It can do wonders with time that is difficult to comprehend to many humans. People who start early and give more time to compound are the big beneficiaries.
It’s really that easy. I keep telling people that for most folks, consistent 10-15% savings rate pretty much guarantees a solid retirement.
That 1M you have lined up (it’s also inflation adjusted) means you get to add $40k using the 4% rule on top of your social security which would add another $20k or so of annual spending assuming an average of $55k annual salary during your working years.
People like to pretend it’s hard. It might be to some folks, but relative to literally anywhere else in the world, retirement in the US is easy mode.
You’re not missing anything; it really *is* that easy when you have time on your side.
However, I would not plan on cutting your savings after hitting $100k. Every dollar you continue to save means retiring earlier, while you still have the health and energy to enjoy it.
Yes, it is that easy. But you might want to aim higher than $1M. Which, in your case, appears will also be easy.
It seems easy now because you are living at home with no debt. Depending on your life trajectory, it gets much harder once you rent/own a house, get married, have kids, etc. That being said, you are off to a great start!
The power of compounding interest! OP there’s a little more to your retirement calcs to consider: inflation & cost of living 30-50 years from now…but if you spend less than you make, save aggressively, but take a little money to enjoy your life now you very well may have found the “secret” to retirement. No debt, emergency fund, save for future. Oh, I wished I had started a ROTH in addition to my 401k sooner…the income taxes on my 401k withdrawals is gonna sting a wee bit. (not much). Just keep in mind that your life 10 years from now is probably going to be much more expensive than it is today…house, kids, cars, schools, travel…
What number did you use for compounding annual growth? To be realistic you want to use ~5%. That’s 8% global average market returns minus 3% average inflation. This will give you an inflation-adjusted number, so instead of 1 million it’ll be whatever amount of money at that time in the future represents the purchasing power of 1 million today.
You want to be able to withdraw 4%/year and have that number replace ~80% of your income. You can aim for a higher percentage of your income if you just want to kill it, some people aim to replace 100% or more. Or you could aim for a lower number if you want to rely on social security still existing in 40 years. With 1 million you could withdraw $40,000/year. Is that enough to live on?
If you start young it is pretty easy though. That 10 years of compounding you have over someone starting in their 30s is massive. You probably only need to contribute about 15% of your income, whereas someone starting in their 30s will have to contribute more like 25%
1 million will probably not be enough because of inflation.
Good job getting started. Keep saving aggressively.
Nope. If you can and do start saving aggressively early one it IS that easy. Unfortunately most people don’t get the combination of well paying jobs and low expenses early. But when they do and take advantage of it, they can set themselves up for life.
You’ve done what’s called front-loading your retirement savings. Now that balance will grow over the next 40 years, even if you don’t add a dime.
But moving out will cost money. Prepare to focus for some time on your current needs. If you can maintain retirement contributions, great, but if you have to go a little lighter on future contributions while you set up your household, that’s okay.
A million dollars in 35 years and inflation rate of 3% has the equivalent current spending power of $400,000. So you want to save and invest 2.5 tines what you mentioned.
Investment returns are uneven. The S&P did not exceed its year 2000 value until 2012 due two recessions. The past three years the &P has increased a total of 50%.
Yes, you are correct. However, you need to look at that in context. $1 million is a lot of money today, but it won’t be when you reach 65 after 30 years of inflation. This would be like someone 40 years ago thinking $300k would make them rich when they retired in 2026. You can’t think in today’s dollars. You have to assume your money in retirement will only buy you 1/3 of what it will buy you 30 years from now. So, you will likely need $3 million when you are 65 to have the equivalent of $1 million in today’s value.
You are also talking about needing to fund your life for 20 to 40 years after retirement. Even today that is not a ton of money. You’re talking about $40k to $50k each year coming off that $1M.
I say all of this to give you good news. You are off to a great start. Keep going and saving for the long term. Never stop adding to your retirement… never. People who have tried doing this tend to regret doing it because they don’t have enough saved up. They planned on a $50k a year retirement because that seemed like a lot when they were 25. They hate having to go back to that lifestyle when they were just living off of $130k before retiring. Don’t be one of those people.
As you get raises or bonuses, that new income should be split between your retirement accounts and your lifestyle. This way your retirement savings will grow with your lifestyle and be able to continue that lifestyle through retirement.
Missing:
(1) If you get to $100k by 30, you should be able to expect what “feels like” $800k by age 60, so, $1 million by age 65 is not crazy. But, $1 million only gives you around $40k/year (or what $40k feels like today) to live off of each year for 30 years. That is a really great start, but you will probably want to aim for more.
(2) A lot of things happen between 24 and 65. Those things might prevent you from saving some years or even reduce your savings. Illness, kids, job loss etc.
So, what that means is YES, you are set up for lots of financial flexibility! No, you may not need to be maxing out your accounts in your 30s. We tend to recommend 15% of income if you start young, and you started young and strong!
What I would do over the next 6 years is balance. $100k by 30 isn’t so important. If you can do $10k a year and save for other things, that would be great. Other things: House down payment, emergency fund, wedding, health savings. Having relatively accessible savings for big life changes in the next 10 years will help preserve your retirement savings.