How many of us have the wealth to retire comfortably and maintain our current living standard? How many of us are able to put 20% down on a new home? How many of us can invest $30,000 into a new or existing business? According to the Economic Policy Institute, nearly half of working-age families have no retirement account savings and those that do do not have nearly enough. That is a very scary number.
Why are so few families saving enough for retirement? Usually, the answer is, "I don't make enough to save for retirement." Or, "I'll save for retirement when I make more money." The fact of the matter is, most people can save for retirement and wealth accumulation, but just choose not to. Either because they value current expenses more than future expenses or it just seems too hard. I will admit, socking away 10% or 20% of one's income seems like a pretty daunting task. And that is money you cannot touch which makes it even less appealing. The truth is if you want to live comfortably in retirement, buy a home or invest in a business, you must start saving and investing now. Not next month, next year, in 10 years, but right now. The longer you wait, the less you will have. How much less? The table below summarizes the results. (Note: All time value of money calculations assume $0 currently saved and monthly compounding.)
The numbers are staggering. Investor #1 started saving for retirement at 22 years old as soon as she graduated from college and started her career. Assuming she saves $5,500 per year (maximum currently allowed in an IRA) and earns 7%, she will have $1,501,559 by the time she reaches age 65. Investor #2, by waiting 10 years to start saving, assuming the same rate of return and contribution, will only have $707,696...a difference of $793,864. That is a lot of money to give up on! Investor #3 and #4 are in even worse shape by waiting 20 and 30 years to start saving. 10 years is the difference between being a millionaire and not. Assuming Investor #1 earns $55,000 a year in income, that equates to a 10% savings rate. Now imagine if Investor #1 invested 20% of her income. The table below summarizes the results.
If Investor #1 saved 20% of her $55,000 gross income versus just 10%, earning 7% return, she would be a multi-millionaire by the time she turns age 65. This hypothetical exercise illustrates the fact that future wealth is a function of time and how much is invested today. The more one invests today and the more time those investments have to grow, the more wealth one will have. You do not have to be rich now to get rich; but it all starts with saving and allowing those savings to grow for as long as possible. But how much does one need to save to at least maintain their current living standard? The table below summarizes the result.
Using Investor #1 as an example again, in order to maintain a $55,000 per year living standard in retirement from age 65 to 97, she needs to have $3,044,209 saved up by the time she turns age 65. She can accomplish this by saving 20% of her income and earning a 7% return. If she is comfortable with a 15% reduction of her income in retirement from when she was working (not unusual for retirees), she only needs to save up $2,587,577 by age 65 which requires saving 17% of her income and earning a 7% return. What happens if she only saved 10% of her income while earning a 7% return? She would still accumulate $1,501,559 and technically be a millionaire, but she would have to reduce her monthly income to half what it was while she was working. This might still not be too bad if she has an inheritance, pension or social security to supplement the reduction in income.
As demonstrated above, it is entirely possible for an average working-class family to maintain their living standard in retirement (and become millionaires at the same time) by diligently saving and investing 10-20% of their income. These savings are also the basis of buying a home or investing in a business. It also cannot be de-emphasized the importance of living below one's means. Pay down non-mortgage debt as quickly as possible. Cutting unnecessary expenses like unused subscriptions and eating out can go a long way. Now for the hard part. How does one save 10-20% of their income? It sounds easier said than done.
That is why automating the process is crucial towards reaching your financial goals. Below are several ways to save and invest automatically.
Acorns is a phone app you can download on your phone which links to your checking accounts and rounds up every transaction to the nearest dollar (which they allow you to multiply by 2x, 3x, or 10x), transfers the round-up into an individual brokerage account and automatically invests the money into a diversified portfolio of stocks and bonds. For example, if you buy a Starbucks coffee for $4.01, Acorns will round up the transaction to $5.00, withdraw the $0.99 from your checking account, transfer it to your Acorns account, and automatically buy stocks and bonds with it. You do not have to know anything about the stock market. All you have to do is answer a few basic questions on your risk tolerance and Acorns does the rest. The investments they purchase are Exchange Traded Funds (ETFs) which hold inside of them hundreds or even thousands of stocks and bonds so you know you are diversified. Currently, Acorns is still working on a tax-deferred/exempt Individual Retirement Account (IRA) option which you can join their waiting list. Until then, they provide only a taxable individual brokerage account. Acorns costs $1 per month for accounts less than $5,000 and 0.25% per year for accounts larger than $5,000.
Qapital is a phone app you can link to your other checking accounts. They allow you to set pretty much any savings rule you want and then they automatically execute the rule for you. One rule you can set up is to tell Qapital to round up all your transactions to the nearest $1, $2, $3, $4 or $5 and they will take the round-up and deposit it into your Qapital savings account. They have a myriad of other rules to choose from. Qapital also provides a debit card so you can access the money if you ever need to. Perfect as an emergency fund account. Qapital also has bank overdraft protection so that if your checking account balance drops below $100, they will temporarily suspend any further transfers until the balance rises above $100 again. Qapital is free to use and also pays you interest on your account.
Digit is a phone app which links to your other checking accounts. Digit analyzes your income and spending habits, and determines the amount of money you can safely set aside without running out of money. It then automatically transfers this amount into your Digit savings account. You can withdraw the money at any time if you need to. They also have a "no overdraft guarantee" where in the unlikely event the checking account is over drafted, they will pay any overdraft fees incurred. Additionally, they have a "low checking account balance protection" feature which automatically transfers money from your Digit savings account back into your checking account whenever it gets below a certain amount. Another great way to build up an emergency fund. Digit is free for 100 days and then costs $2.99 per month afterwards. Digit pays a 1% annual savings bonus paid every 3 months on the average daily balance of your Digit account.
Chime is an online bank with no minimum balance requirements, monthly or overdraft fees. Chime intends to be your checking and savings account. Enroll in their Automatic Savings program and for every transaction using your Chime debit card, Chime will round up the transaction to the nearest dollar and automatically transfer the round-up to your Chime savings account. Chime also has the option to save 10% of every paycheck by automatically transferring the amount into the savings account on paydays.
DISCLOSURE: We have no business relationship with any of the above-mentioned companies nor receive any financial compensation from them.