Resolving to Retire with a Nest Egg

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Retirement nest egg i

If you start saving $300 a month — or $3,600 a year — when you're 25, and earn an 8.5 percent annual return and reinvest your earnings, that money will be worth $1,064,457 when you're 65. iStockphoto hide caption

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Retirement nest egg

If you start saving $300 a month — or $3,600 a year — when you're 25, and earn an 8.5 percent annual return and reinvest your earnings, that money will be worth $1,064,457 when you're 65.

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The Rule of 72

Steve Mariotti, the founder and President of the National Foundation for Teaching Entrepreneurship, says one of the most crucial lessons for retirement saving is the "rule of 72."

 

This is a quick mathematical formula for figuring out how long it will take your money to double at a given interest rate. What you do is divide 72 by the interest rate and that tells you how many years it will take your money to double:

 

72 / interest rate = time for money to double

 

So, if you're earning 8 percent interest, 72 divided by 8 equals 9 years. At 7 percent it's around 10 years.

 

Once he gets young people playing with this formula, Mariotti says they quickly grasp how huge their savings can become if they start in their 20s or even as teenagers.

 

If you invest $500 when you're 18 years old and earn 8 percent interest, it becomes:

  • $1,000 at 27 years old
  • $2,000 at 36 years old
  • $4,000 at 45 years old
  • $8,000 at 54 years old
  • $16,000 at 63 years old

Mariotti says parents and schools should be teaching their kids about compound interest. He says once young people understand it, they are much more motivated to save for the future.

When it comes to New Year's resolutions, saving more money is a popular one — even if it's seldom kept. Americans are not terribly good at squirreling away and investing part of their income for their golden years.

At lunchtime in downtown Boston after Christmas, the streets were thick with people dashing around to stores and going out to eat. Leah Volpe was carrying a shopping bag in one hand. And she was about to do something that might make her financial planner quit in protest — she's pulling out money from her 401(k) so she can go to Bermuda on vacation.

"I'm going to enjoy myself," she says "I'm only 31 so I don't really care about retirement yet."

A Great Wonder

The money you save in your 20s and 30s will give you a tremendous return compared with what you scramble to save when retirement is just around the corner. Steve Mariotti, the founder and president of the National Foundation for Teaching Entrepreneurship, sees the mathematical forces at work as key — not just for retirement but for teaching people to rise out of poverty.

"I think one of the most important things that you can teach a young person is the power of compound interest," Mariotti said. Albert Einstein agreed when he called compound interest one the greatest wonders of the universe.

Here's an example: If you start saving $300 a month — or $3,600 a year — when you're 25, and earn an 8.5 percent annual return and reinvest your earnings, that money will be worth $1,064,457 when you're 65.

But if you wait until you're 35 to start saving the same amount, you'll only have $447, 173. If you wait until you're 45 you'll have even less — $174,000. Think about that. If you start when you're 25, you're saving for just twice as long, but earning more than eight times as much money.

If you start saving early, Mariotti suggests putting away — as a back-of-the-envelope calculation — 10 percent of your income. If you wait until later in life, you'll have to start saving 20, 30, or 40 percent of your income to try to catch up. So the longer you wait, the larger the burden.

Financial advisers recommend that you have accumulated 10 to 15 times your salary if you want to enjoy a similar standard of living in retirement. So if you earn $80,000 a year, that's in the neighborhood of $1 million.

What My Savings Will Be Worth

Use this calculator to figure out how much you'll have at age 65 if you save a set amount every year between now and then.

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