When it comes to saving for retirement, the earlier you can start the better.
If you start saving at the beginning of your career, youre only going to have to put aside a little every month to be able to retire with an enormous sum as the power of compounding does all the heavy lifting for you. Indeed, if you start saving at age 25 and retire at 65, you only need to put away 100 a month and achieve an annual return of around 10% to retire with 600,000 (excluding inflation).
However, starting saving later in life makes building wealth harder because youre unlikely to benefit from compounding as much as a younger investor. Nonetheless, it is still possible to retire with 1m if you start saving at 45 and if you make the right decisions. After all 99% of Warren Buffetts wealth today was earned after his 50th birthday.
Time to start saving
Unfortunately, if you start saving at 45, youre going to have to work a bit longer than usual and youre going to have to save more than a 25 year-old would be able to get away with. Still, its likely that at age 45 youll have more capacity to save more as you may have already paid off a portion of your mortgage and be earning a higher wage than entry level 20-somethings.
For the purpose of this example, I will be using an annual return rate of 10%, which is slightly on the high side but it is still achievable if you invest your money in high-quality growth and income stocks.
If you save 100 a month at age 45, and retire at 70 with an annual return of 10%, youll retire with a pension pot of only 130,000, a respectable figure but not the 1m benchmark desired. To reach this goal, you will need to contribute more every month. Doubling the monthly contribution to 200 will leave you with 259,000 at 75, and a monthly contribution of 300 will give you 388,000 within 25 years.
Starting from zero
All of these examples assume that you start off at zero. Once again, this is where the 45 year-old might be better off than the younger saver because its more likely you will have already saved a small nest egg at this stage in life. Assuming a small savings pot of 10,000 to start, a 300 monthly contribution will give a total of 502,000 within 25 years half-way there.
To reach the 1m mark with the lowest possible monthly contribution, an initial fund of 25,000 is needed. If you have this pot at age 45, you can get away with saving 550 a month to reach 1m by 70. If you dont have this nest egg to begin with, the lowest monthly contribution you can get away with is 775.
For some comparison, if you saved 775 every month from age 25, you would have 7.6m by age 70. Put simply, yes you can save 1m by retirement at age 45, but it pays to start saving sooner rather than later.
Ready to start saving?
To help you reach your saving goal and achieve financial independence, Motley Fool is here to help.
Our analysts have recently put together this brand new free report titled The Foolish Guide To Financial Independence, which is packed full of wealth creating tips and investment ideas tohelp turbochargeyour investment returns.
The report is entirely free and available for download today.