Save Now, Retire Well

The headline in a recent Wall Street Journal Sunday was eye-catching: “Your Ticket to a $1 Million Retirement.” While a cool million may be out of reach for some, columnist Paul Farrell offered sound advice for building a large nest egg before retirement. Think of it as a hedge against Social Security reform.

In case you missed the column, published in the Bangor Daily News, Mr. Farrell’s advice is simple: Save 10 percent of your salary. Don’t think that will add up to $1 million? Follow his math. If you start investing $150 a month at the age of 25, you’d have about $955,000 tucked away when you hit 65. Even in Maine, where wages are about 90 percent of the national average, most people are paid more than $18,000 a year, from which the 10 percent comes.

Knowing that people will argue that it is too hard to save, Mr. Farrell came up with a list of the 10 most common reasons people give for not saving. No. 1 is that they have no money left after paying the bills. To this, Mr. Farrell asks where does the $5 for a fancy coffee and muffin at Starbucks come from? A more Maine scenario might be the $5 spent on a lunch of a burger, fries and soda at the nearest fast food joint. Instead of eating out, Mr. Farrell advises putting about $11 a day into an individual retirement account. At the end of the year you’ll have $4,000, not including interest.

Which points to the most important part of the lesson – compounding interest. In his example where saving 10 percent resulted in nearly $1 million by retirement age, most of the growth came from interest. The person in his example only contributed $72,000 of his own money, the rest came from compounding interest.

It works this way: If you invested the $1,800 a year he suggests and that money earned 10 percent interest (possible if the money is in a stock market fund, not the bank), you’ll earn roughly $200 in interest the first year. That means that money is worth nearly $2,000 the following year, earning more than $220 in interest. The bigger the nest egg, the quicker the interest adds up. If someone started saving at the age of 40 and put away $1,000 a month, they’d end up with more than $1,330,000 when they were 65.

So, instead of buying the latest cell phone and signing up for a gazillion minutes or swapping the family sedan for a fancy SUV, put the money in the bank or a low-fee mutual fund. You could end up a millionaire.