[vc_row][vc_column][vc_column_text]A couple Sundays ago I was eating dinner with my mom and dad. My mom is a doctor, and she was talking about how many patients she sees who are past retirement age and tell her they need to stay well in order to work because they don’t have enough money to retire. My dad mentioned that this seems to be fairly typical and is likely to get worse for those who didn’t save enough for retirement. Now, I know most of us in college are not thinking about retirement. But maybe we should.

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Up until the last 20 years or so, most people were enrolled in what is called a Defined Benefit plan. It’s a type of retirement plan that pays you some percentage of your regular income for life. You contribute a little to it each year, and you end up taking a lot more out later. Nowadays such plans are rare, and most people are enrolled in what’s called a Defined Contribution plan. In this plan you get what you put in and maybe a little more from your employer, plus what the money earns over time. Your contributions are not taxed, and the earnings are not taxed until taken out. So, the government gives you a break on that.

For Defined Contribution plans, which is what most of us will have, how much you put in every year, what rate of return you earn on the money and especially how soon you start saving are the keys to a financially happy retirement. In fact, small changes in any of these variables have huge consequences.

So how much in annual income would most of us consider enough to live comfortably in our old age? Thinking in averages, it seems that about $75,000 a year would work. And if someone retires at age 65, it can be anticipated that they would live approximately 20 more years, which would require a total of $860,000 in retirement funds earning six percent a year.

If someone invests $1000 every year for 40 years, which gets us to about retirement age, with a rate of return of seven percent, he or she is looking to end up with about $214,000 for retirement, which isn’t much. By investing $2,000 instead of $1,000, everything else held equal, the investing individual winds up with about $429,000. And by investing $5,000 under the same circumstances, the final number is about $1,073,000. Furthermore, by increasing the interest rate by only one percent, our retiree ends up with $280,000 with a $1,000 investment annually, $561,000 for $2,000, and $1,403,000 for $5,000 over the course of 40 years. And by just increasing the number of years to 45 before retirement, keeping the interest rate at eight percent, retirees are looking at $418,000 for a $1,000 a year investment, $836,000 for $2,000, and $2,092,000 for $5,000.

The slightest changes can make a huge difference in financial security and comfort for retirement. And the most important factor is already in our control: time. People can’t really control the interest rate that affects their retirement investments, but investing as soon as possible and as much as possible can make substantial differences in how much money someone will have for retirement. Starting early is the key, more so than the amount invested, and even an extra five years can be life-changing. But note that by shooting for the average $860,000 I generated, over the course of 20 years, there is nothing left over. It’s all spent. So,problems may arise if people live longer than planned, or if they wish to pass some extra money onto loved ones. So, if you’re 70 years old and still working because you can’t afford to quit, remember what you read in the Chrony 40-some years earlier.

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