The best retirement plan: start saving early

The ideal plan is built around one powerful fact: the sooner you put compound interest to work, the greater your nest egg and your financial flexibility when you’re ready to retire. $1 contributed at age 20 would be worth nearly $6 at age 65 (assuming an annual 4% return). And if you saved $7500 per year over the course of a 45-year career, you could retire with a million dollar nest egg, or even more if your employer offered contributions.

For most of us who landed that first job in our 20s, funding retirement was the last thought in our heads.  Those smarties who realized that time was their power tool will be benefiting from a whole lot of free money as they retire. But even late-blooming savers can enjoy a bouquet of retirement benefits, with a little strategic planning

Financial Action Plans

For Your 30s & 40s

Now is better than never

Getting a late start on retirement funds can still get you to a million dollar goal, but you’ll have to save harder and longer. For instance, you’d need to set aside $12,000 each year from age 30. 40-year-olds will need to save more than $20,000 yearly. And for 50-year-olds, the target saving amount jumps to $45,000 a year.

How much is enough?

Unfortunately there is no easy answer to that question, because it depends on your lifestyle, expenses, pension and Social Security income, and potential unplanned costs such as medical bills.


Some experts recommend retirement income should be 70% - 85% of your pre-retirement income. In other words, if you are currently earning $100,000 a year, you should expect to need $70,000 - $85,000 a year for a comfortable retirement lifestyle. But depending on where you are in your career right now, your income may change a lot before you’re ready to retire. And many of your expenses may disappear, such as a home mortgage, supporting your children, or commuting costs. On the other hand, new expenses may appear, such as prescription and medical costs, and hiring folks to do tasks such as shoveling snow, raking leaves and maintenance.

The 4% rule

Here’s an easy-to-use formula that many experts use to calculate retirement savings goal. The rule assumes that you will withdraw 4% of your portfolio each year. So calculate your current annual spending, multiply it by 25, and that is the size your retirement portfolio should be.


Say your expenses right now are $40,000 a year. 25 times that equals a $1 million retirement portfolio. With that amount, you can withdraw the 4% you need to cover expenses each year, and you will probably not outlive your savings.

Time to set the goalpost

Pre-retirement is the time to set your goals, scrutinize your assets, and weigh your options. There are many online calculating tools that can help you determine your retirement needs. This link to the AARP tool might be a good place to start.


It might also be a good time to meet with a certified financial planner who specializes in retirement strategies. CFPs are licensed and regulated, and commit to continuing education and ethics classes to maintain their license.