I remember exactly where I was when I realised how long it would take to save up a year’s worth of income.
I think I’ve told this story before, but I started my first full-time office job eager to save money. I was going to live below my means! I was going to build my emergency fund! I was going to contribute to my retirement accounts and get the company match!
Then I started doing the maths.
Even if I saved 20 per cent of my pretax income for retirement, which seemed like a phenomenal amount, it would take me five years of working to save up one year’s worth of income.
And sure, investing that income should help it grow, and keeping my expenses down should suggest that I wouldn’t necessarily need one year of pretax income for every year of retirement, but I couldn’t really control those factors. (Inflation? Market crashes? Healthcare costs? The fact that I desperately wanted to be able to spend more money when I got older, otherwise I’d be stuck in a miserable moldy apartment forever?)
All I could control was how much I saved, and given the perpetual threat of layoffs and unemployment and unexpected major expenses, I couldn’t even control that.
It was a hugely discouraging moment, especially when I added up all the years between my age at the time (27) and the age at which I planned to retire (67?) and divided by five.
If I saved 20 per cent of my pretax income for 40 years, I might only have enough money to fund eight years of retirement—and that’s if I didn’t need the money for something else first.
But, and luckily for me, I decided to save money anyway.
Over the next ten years, I saved my first $US10,000 ($14,000), changed careers twice, got myself into $US14,000 ($20,000) of credit card debt during one of the career transitions, got out of debt, got into investing, and built my net worth to its current $US116,293.34 ($165,379).
I’m still not sure if I’ll have “enough” for retirement - I hope I will, and I’m actually hoping I’ll be able to retire early, but I’m taking the advice the online calculators give me with a grain of salt.
And so should you.
As Grant Sabatier, author of Financial Freedom, told CNBC, it’s all about saving what you can and not letting the long-term maths get you down:
If you are not investing any money at all, it’s hard to imagine you can actually reach $10,000.
It’s definitely not a good idea to fool around with retirement calculators. The person who is saving a minuscule amount —say $10 a week — can be in for a rude shock: the error message.
It’s daunting, to say the least, to be told it will take you 487 years to reach retirement or to get an error response.
Instead, Sabatier recommends starting with smaller numbers and more manageable goals. “Once I’d save $500 to invest, my next goal was $1000,” he said. “It’s a mindset trick to get to your first $10,000.”
After I saved my first ten thousand, it felt like I could do anything. (It also felt like the end of a very long and stingy slog, and I knew that I needed a better work-life-savings balance if I wanted to keep this up in the future, but it was still a huge accomplishment.)
After I saved my first $100,000, and the calculators started hinting that I could retire in 10 years if I kept saving and investing at this level, it felt exciting - but it was also a reminder that I hadn’t really done anything differently this time around.
I was earning more money and living in a low cost-of-living area, so I could save more. In the future, I might earn less and/or be able to save less.
So all I can do is keep up what I decided to do when I was 27: save as much as I can, invest what I can, and hope that everything else works itself out.
That’s what I hope for you, too.
(Also, go read Financial Freedom. It’s one of the best personal finance books I’ve read in a long time.)