Is This Silly Mistake Keeping You From Retiring Early?

Getting this right can make all the difference in the world.

It’s been said before and will be said again: Investing for retirement doesn’t have to be hard. In fact, building a comfortable retirement nest egg can be more about what not to do than it is about what to do. The last thing you want is to make a silly mistake or two to keep you from retiring early. The No. 1 thing not to do is put off investing for retirement, followed closely by not taking full advantage of your 401(k) or employer-sponsored plan.

Don’t assume you can play catch-up later

If you’re like most Americans, your primary retirement savings vehicle is provided by your employer via a 401(k) plan or something similar. If you have a 401(k), the key is to not only start early but to also get the full company match. This may sound like a no-brainer, but a recent survey by CNBC found that 41% of workers who have access to a 401(k) don’t contribute anything to it. The reasoning for many is likely that they need the money now and can’t afford to set aside even a small portion of their paycheck for something down the road, particularly in this period of high inflation. But the truth is, you can’t afford not to contribute, especially if you want to retire early. Another startling statistic from that survey was that only 24% of those with employer-sponsored plans contributed enough to get the full company match. That’s giving up free money. Companies offer an average 4.7% company match, according to the survey. Whatever the percentage is at your company, you should contribute at least enough to earn the full match. If your employer offers a 4% match, that means you should contribute what’s necessary to collect that 4%. If it sounds like too small an amount to make a difference, let’s examine how big an impact starting early and getting the full company match can have on your retirement savings long term. To illustrate the difference, consider two hypothetical investors — Rick and Tammy.

Rick and Tammy, a tale of two investors

Both Rick and Tammy are currently 35 years old, but Rick didn’t start investing in his 401(k) until he turned 35. He was weighed down by student debt, mortgage and car payments, and everything else, so before this year, he decided the money was better spent elsewhere. Tammy is in the same boat in terms of her salary, expenses, and other obligations, but she found a way to start investing in her 401(k) 10 years ago at age 25. She did the math and determined that if she invested just 4% of her $35,000 per year salary at age 25, it came out to $1,400 per year. That translates to about $54 per biweekly paycheck, or about $27 per week. The way she saw it, she could afford to save $27 each week by cutting out her morning coffee purchase and bringing in lunch from home a few days per week. Tammy also understood that the company offered a 4% match, so from the start, she was getting an additional $1,400 per year from the company. So let’s do the numbers, starting with Rick. Rick finally starts investing in his 401(k) at age 35 but is still nervous about covering expenses, so he only contributes 2% of his salary. He still has hopes of retiring early at age 60, so let’s see where he will be after 25 years, assuming a $47,000 salary at age 35 with a 3% annual raise. Let’s also assume a 10% return in his portfolio. At age 60, Rick would have about $247,000. By not taking advantage of the full company match, his employer contributes only about $35,000 to his retirement fund over the course of 25 years. Now let’s look at Tammy. She started at age 25 when she was making $35,000 a year. She consistently contributes 4% and gets the full company match of 4%. After 35 years, with the same 3% annual raise and 10% annual return, she would have $1.1 million at age 60. And with the company match, Tammy receives over $87,000 from her employer over that period.

Be a Tammy

With a little foresight and even small cuts to her budget, Tammy will have about $800,000 more at retirement than her friend Rick. And even if Rick does meet the full 4% company match from his start at age 35, he’d still only have about $495,000 at age 60. That’s certainly nothing to sneeze at, but it’s still less than half of what Tammy will have by starting 10 years earlier. The bottom line: Don’t be a Rick, be a Tammy.