Is there Magic in Saving Early for Retirement?

“Retirement” is a fairly recent idea that didn’t take hold until after WWII.  Prior to that, people worked until they couldn’t, and they were more dependent on their kids and grandkids to take care of them.  An independent retirement became possible after World War II for three reasons:

  1. Personal savings
  2. Social Security
  3. Corporate Pension Plans.

These are referred to as the “3-legged stool of retirement.”

Saving Early for Retirement

In general, people retiring today don’t have enough money saved to support them and so they are relying more and more on Social Security and Pension Plans.  The problem is: Social Security and most Pension Plans are underfunded.  Today’s retirees MAY receive all the Social Security and Pension payments they’ve been promised; but their children and grandchildren will not.  There’s simply no money.

So, we all know we SHOULD save more.  But should’ve, could’ve, would’ve… we all rationalize on the whys of not saving more.  None of which really sound like good excuses. Here are just three reasons why to save for retirement as early as possible:

  1. You should not rely solely on Social Security Income (SSI)*
  2. Access to tax-advantaged retirement accounts will increase your flexibility in managing your tax liabilities today and in retirement.
  3. The compound effect of investing over long periods of time is the eighth wonder of the world.

*According to among elderly Social Security beneficiaries, 21% of married couples and about 45% of unmarried persons rely on Social Security for 90% or more of their income.

1. Don’t Rely on SSI Solely

Retirees will need about 70% of their work income to live comfortably in retirement. So there’s a rule of thumb: Even with Social Security, you need to come up with about 60% of the income you’ll need to live comfortably after you retire.

2. You want Tax-Advantaged Retirement Accounts

Accounts designed especially for retirement saving offer a variety of tax advantages; pre-tax and tax deductible contributions, or tax deferred and tax free earnings.  It depends on the type of account AND your eligibility for using the account, but those options exist.  When you have a traditional 401k, 403b, or similar plan in the workplace, for example, your contributions to the plan will show on your pay stub as a pre-tax deduction.

Types of tax-advantaged accounts
  • Traditional IRAs.
  • Employer Sponsored Retirement plans like 401(k) plans, 403(b) plans, and 457 plans
  • Roth IRAs
  • Annuities
  • Savings Bonds
  • Life insurance

3. The compound effect of investing
Invest early and you will be rich… we’ve all heard this. It sounds cliché, but there is a good reason why we hear this over and over again. It’s true. Data doesn’t lie, so let it drive your decision to start saving early.

If you’re under the age of 35, you have one of the biggest advantages out there when it comes to planning for eventual financial freedom. You have time. How much you can put away per month does matter. As this example on Money Under 30 tells us.

● Michael saved $1,000 per month from the time he turned 25 until he turned 35. Then he stopped saving but left his money in his investment account where it continued to accrue at a 7% rate until he retired at age 65.
● Jennifer held off and didn’t start saving until age 35. She put away $1,000 per month from her 35th birthday until she turned 45. Like Michael, she left the balance in her investment account, where it continued to accrue at a rate of 7% until age 65.
● Sam didn’t get around to investing until age 45. Still, he invested $1,000 per month for 10 years, halting his savings at age 55. Then he also left his money to accrue at a 7% rate until his 65th birthday.
● Michael, Jennifer, and Sam each saved the same amount — $120,000 — over a 10 year period.
● Sadly for Jennifer, and even more so for Sam, their ending balances were dramatically different.


Without planning and increased personal savings, an independent retirement at age 65 is uncertain, and you may wind up working until your last decade of life.  Your financial independence and material comfort will depend entirely on how much you earn, spend, save, and invest.  You are not too young to start earning more, spending less, and saving the difference.  Do not plan on getting sufficient help from the government or your employers; the money simply isn’t there.

Save and invest, save and invest.

We would love to talk with you about your financial aspirations and needs. At Muhlenkamp making your money grow is our top priority.

The opinions expressed are those of Muhlenkamp and Company and are not intended to be a forecast of future events, a guarantee of future results, nor investment advice. Investing in stocks, mutual funds, and other assets involves risk. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Principal loss is possible. Past performance does not guarantee future results.

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