long road with word "Retirement" written on it

The Power of Compound Interest: Why Procrastinating on Retirement Savings is a Mistake You Can't Afford

Saving for retirement should always be a priority, no matter your age or financial situation. Unfortunately, nearly half (42%) of Americans age 18-29 have no retirement savings and 26% of the 30-44 age group also lack savings for retirement. Whether or not your employer offers a retirement savings plan and a match on your contribution, you can always start saving for your golden years on your own. In this article, we’ll explain the power of compound interest in retirement savings, why procrastinating on retirement savings is a mistake, and how much you should be saving every year.


How does compound interest work in retirement savings?

Compound interest refers to the “magic” of earning interest on interest. This is why the sooner you start saving for retirement, the more time your funds have to grow and compound. Progress can feel slow when you first start saving, but as your balance grows, compound interest will accelerate that growth.

For example, let’s say you put $500 into a retirement savings account with an annual return of 5%. Even if you didn’t make any more deposits into this account, your balance would be $525 after a year. Then, you earn that 5% return in the second year on both your original balance and the $25 interest you earned in the first year. Voila! That is the magic of compound interest. After the second year, and again without any additional deposits from you, your balance continues to grow. At the start of year 3, you’d have $551.25 in your retirement savings account.

Just imagine how much faster your balance can grow when you do make regular and recurring deposits to your retirement savings account. Use our compound interest calculator to test out different investment amounts, interest rates, and periods of time. Don’t procrastinate–the earlier you start saving for retirement, the more time your money has to grow.


How much should I be saving for retirement?

The answer to this question is a personal one. You can find plenty of recommendations online, such as the advice to save 10-15% of your annual income in a retirement savings account. Ultimately, it comes down to your current financial situation, desired retirement age, and desired income in retirement. Here are some questions to consider:

  • Are you married or single?
  • If married, is your spouse also working and contributing to a retirement savings account?
  • Does your employer offer a match on your contributions to a 401(k) plan or similar option?
  • At what age can you collect your full Social Security benefit?
  • At what age would you like to transition out of the full-time workforce entirely or into part-time work you find fulfilling?
  • What is your current income?
  • What will your expenses be in retirement? For example, just because your house is paid off doesn’t mean you stop having to pay property taxes, homeowners insurance, and repairs/maintenance.
  • What is the projected inflation rate between now and your desired retirement age?
  • You may spend less on certain things in retirement, such as commuting or buying work clothing. But you may spend more on other things, such as travel and hobbies.

Whatever age you are now, thinking through these questions will help you develop a loose goal for your total retirement savings and income in retirement. If you fear you are already behind, don’t despair. Simply take a first step that feels manageable to you.

For example, if you’re not currently saving for retirement, take the step of opening a retirement savings account. This could mean enrolling in your employer’s 401(k) plan or opening an Individual Retirement Account (IRA). These types of retirement savings accounts also come with certain tax advantages–talk to your tax advisor to see how you could benefit.

If you already contribute to a retirement plan or savings account, good for you! Consider raising your contribution by one percentage point or setting your contribution to automatically raise by one percentage point each year. If you want to get more specific, this T.Rowe Price article offers benchmarks and recommendations by age.

You can also use our retirement savings calculators to estimate how much you should be saving based on your current income, expenses, and retirement goals.

What is the best age to start saving for retirement?

Simply put, the best age to start saving for retirement is whatever age you are now. It’s never too early to start–as you’ve seen, time is on your side when it comes to saving for retirement. The more years you have between now and retirement, the more interest can compound and your balance can grow.

For example, if a 25-year-old and a 35-year-old both start putting away $100/month in a retirement savings account, the younger saver will have almost twice as much saved by age 65. That’s the power of time and compound interest.

However, starting now, wherever you are in your life and career, is always better than waiting another day, week, month, or year. The worst thing you can do is to keep procrastinating on saving for retirement. After all, you may think you can work as long as you need to, but illness, physical disability, or layoffs could force you to retire earlier than planned. If that happens, you’ll be glad to have your savings to fall back on.


Can I still save for retirement if I start late?

While starting early is always helpful, it's never too late to start saving for retirement. As your career progresses, your income will likely increase, too, until you hit your peak earning years sometime in your 40s or 50s. It may be easier for you to catch up on retirement savings during your peak earning years. In fact, people age 50+ can make an additional catch-up contribution beyond the annual limit on IRA and 401(k) contributions. Check the IRS’s website for current contribution limits.

If you can, max out your retirement accounts and then save even more in other savings accounts. You can always try to cut your spending to save more.


How does your current lifestyle impact your retirement savings?

Of course, you don’t have to wait until later in life to reduce your expenses. Whatever stage you’re in now, it’s a worthwhile exercise to take stock of your current expenses, both fixed and discretionary, as well as your debt balances and net worth. What steps can you take now, such as creating a budget, paying off credit cards, reducing unnecessary spending, and finding ways to increase income, that will make it easier for you to save and enjoy a comfortable retirement?


Make Jefferson Security Bank your partner in securing a bright financial future!

With a long history of serving the Eastern Panhandle of West Virginia, our trusted team is here to help you achieve your retirement goals. Don't let procrastination hold you back–start taking advantage of the power of compound interest today by increasing your retirement savings and seeking expert financial advice. Join the generations of satisfied customers who have made Jefferson Security Bank their go-to for a secure financial future. Invest in your future now and get on the path to a comfortable retirement! To open a new savings account, contact us or visit your nearest location in Shepherdstown, Martinsburg, Charles Town, or Inwood, WV, and Sharpsburg, MD.