Almost 1 In 4 Workers Have Less Than $1,000 Saved For Retirement

Several times in the past few months I’ve been asked about saving for retirement, employer-sponsored retirement savings plans, and why the company 401(k) is a good benefit.  If you have nothing saved for retirement, you’re not alone.  According to the Employee Benefit Research Institute, nearly one-fourth of workers and their spouse combined have less than $1,000 saved for retirement.   Almost half of everyone surveyed said they have less than $25,000 saved.

Yes, $25,000 sounds like a lot. But it’s a reasonable goal to have stashed away by the time you’re 30.  It’s totally doable if you save 10% of your annual income, which is one rule of thumb from many financial planners.  But one-third of those surveyed are saving less than that.  Many retirement advisors even recommend saving at least 15% of your annual income.

How much does your nest egg need to be when you retire? There’s no right answer as it depends on your lifestyle and many unknown future factors. However, while over 40% of those surveyed couldn’t even guess, most believe it needs to be at least $500,000.

The earlier you start saving, the longer your savings and investments have time to take advantage of compounding.  Compounding is the ability of savings and investments to generate earnings, which are then reinvested in order to generate their own earnings. For example, if you save $1,000 and by investing it you earn 5%, it’s grown to $1,050.  Then if the next year this $1,050 earns another 5%, it’s now $1,102.50.  Every year not only does the initial amount saved grow but so does the growth amount each year.  This effect is called compounding.

How much does the stock market increase on average? There are many ways to answer this and measure the “stock market” annual return.  According to historical records, the average annual return for the S&P 500 (one of the standard measures of the “stock market”) since its inception in 1928 through 2016 is approximately 10%. That’s an average for its 88-year history…  some years it grew more, some years it grew less or not at all, but on average the annual return was 10%.  Adjusting for inflation, the average annual return was about 7%.

The advantages of starting early to save for retirement cannot be overstated. Let me give you an example.  The chart below shows the power of starting early and saving, investing, and compounding.  If you saved and invested $3,600 per year ($300 per month), using the average annual return of 7%, here’s how much it would grow to by the time you’re age 65.

As you can see in this hypothetical example, by investing $3,600 each year from the time you’re 20 years old, it could grow to $1.1 million by retirement at 65.  This is made up of 45 years x $3.600 which equals $162,000.  But when you add in the average annual return of 7% for those 45 years, plus the effect of compounding, it grows to over $1.1M!  Starting later in life is still very good, but with fewer years for the money to grow, it wouldn’t amount to quite so much by age 65.  However, it’s still a nice nest egg for retirement later in life when you want to stop working.

What is a 401(k)?  Simply, a 401(k) is a retirement savings plan sponsored by an employer. It lets workers save and invest a piece of their paycheck before taxes are taken out. Taxes aren’t paid until the money is withdrawn from the account.  There are roughly 55 million workers in the U.S. that do not have access to an employer-sponsored retirement plan.   Fortunately, The California Parks Company offers a 401(k) retirement plan for eligible employees.  These eligible employees need to be at least 21 years of age, have completed six months of continuous employment from date of hire, and have accumulated at least 800 hours of employment in the initial calendar year of employment.  Enrollment is voluntary and occurs each year during January and July.   Once you sign up, the deductions from your paycheck happen automatically.  It’s an easy way to start saving for retirement.

Remember, if you haven’t started saving for retirement yet, or if you’re just a little behind, it’s not too late. Pay yourself first. Whether it’s with the automatic savings of 401(k) participation, or saving and investing on your own, get started now with saving for retirement.

Richard Bayer
Chief Financial Officer
rbayer@calparksco.com