A new survey in the US found that Americans put little of their spare cash toward retirement… Of U.S. adults, 79% typically have cash left over after they pay fixed expenses, the survey says. But only 5% put any of that money toward retirement. Instead, most people spend their extra cash on such things as clothing, furniture and entertainment.
Suppose you save an extra $150 a month this year. That’s $5 a day you’re not spending on, say, a latte or a lottery ticket. If you invest that money and earn an average of 7% per year which is a reasonable expectation.
Over the past 80 years, large-company U.S. stocks returned over 10% per year, on average, according to Ibbotson Associates. Long-term corporate bonds returned nearly 6% per year. So a portfolio mixed between stocks and bonds is likely to earn 7% per year over a long time period. You may do better, but 7% is a fair number to use in your projections. If you start at age 25 and keep investing an extra $150 a month until you’re 65, you’d add more than $359,000 to your nest egg, says Sophie Beckmann, a financial planning specialist with A.G. Edwards.
If you’re older than 25, don’t despair. A $5-a-day plan can still fatten your retirement fund.
With the same assumptions, starting at age 30, you can add nearly $250,000 to your portfolio. If you wait until age 35, you’ll still build an extra $170,000. Even at age 40, shifting $5 per day from consuming to investing will add nearly $115,000 to your holdings by age 65. Saving an extra $150 a month means you’ll have $1,800 less to spend this year. That’s 3.6% of your gross income at $50,000. It’s only 1.8% if you make $100,000 per year.
To illustrate, take the example of a 25-year-old who makes $60,000 and saves $3,000, or 5%. What if he boosts his savings rate from 5% to 7%? Socking away $4,200 a year would add $240,000 by age 65 to his nest egg. It would end up at $840,000 instead of $600,000.
Doubling the savings rate from 5% to 10% would boost the final number to $1.2 million in 40 years, with a 7% investment return. That doesn’t count the extra build up that would occur as earnings increase. The bottom line is that relatively small increases in the amount you invest can have an enormous impact on your net worth. That applies universally to us all, not just to those coffee-guzzling friends in the US!
