Kiplinger’s Personal Finance: Saving for retirement is a marathon, not a sprint | Business News

If you’re in your 20s, you should think of saving for retirement as a marathon rather than a sprint.

Instead of focusing on the amount of money you’ll need to retire in 40 or 50 years, focus on how modest increases in the amount you save in a 401(k) or other retirement-savings plan will compound over time.

For example, suppose you’re 25, earn $50,000 a year, contribute 5% of your pay to your 401(k) and plan to retire at age 67.

If you receive matching contributions of 50% on 6% of pay, you’ll have more than $1 million when you retire (this assumes a 3% annual salary increase and a 6% average annual return on your investments). Bump your contributions up to 6% and you’ll have $1.25 million.

At this age, time is your biggest ally, because even a small amount in contributions will grow and compound free of taxes until you take withdrawals in retirement.

If you start saving in your twenties, as much as 60% to 70% of the amount you’ll have saved at retirement will come from investment gains rather than contributions, says Ted Benna, a benefits consultant who is credited with creating the 401(k) plan. “If you wait until age 40 to start saving, it gets flipped the other way — more will come from your contributions than your investment gains,” he says.

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