When it comes to saving for retirement, there’s no getting around the fact that the more money you earn, the easier it is to save. People can come up with any base number necessary to live a comfortable life, and a lot of it depends on where you live. One site suggests a number of $30,000 for a young adult to live comfortably in Maryland. You can argue the exact number, but the actual number isn’t important to show just how hard it is to save money when you don’t make a lot of money.
If this hypothetical 24-year-old wanted to have $2,000,000 at age 67, he’d have to invest $672.65 a month at a 7% annual return, or $8,071.80 a year. For simple math, we’ll assume he invests this in his 401(k), and pays no taxes on this amount. This means to have $2,000,000 at retirement he’d have to make $38,071.80.
Now let’s see how long it would take this 24-year-old to retire if his salary were a bit higher. Assuming he lived off of the first $30,000 he made, and invested the rest, the following chart shows the number of years he’d have to work to save $2,000,000. The top line (blue) is with a 5% return, and the bottom line (orange) is with a 7% return.
And this chart shows the age he would be when he saved $2,000,000. Just as above, the top line (blue) is with a 5% return, and the bottom line (orange) is with a 7% return.
Most people don’t think about how much investing power each additional dollar they earn has. Nor do people realize a person making $80,000 could potentially retire in half the amount of time as someone making $40,000. It all depends on what each person decides to do with each additional dollar they earn.
Which brings us to the heart of this post. If you want to retire earlier, with higher balances in your retirement accounts, or both, you need to earn and save more money. Typically the way to earn more money is to enter fields requiring specialized skills. Once you land a job in a highly demanded field, don’t get too comfortable.
Why, you might ask?
If you stay where you work, you might be lucky if you get a 1-3% raise. If you aren’t at the top of the pay grade for your specialization, it’s not unrealistic to see a 10-60% jump in your salary by joining another company.
It’s easy to be a cynic and say no one is able to make that much money, but it’s clear people do. The Bureau of Labor Statistics May 2014 wage estimate shows that the average wages were $47,230 for the over 135 million employed Americans.
The average salary for around 32 million of those jobs was over $60,000, and over $100,000 for around 8 million. Take a look at the spreadsheet and see where your job falls.
Few employers would tell employees that they will get a bigger jump in salary by jumping to another company than they will through promotions, so it’s up to you to see if this a realistic option for you. Money isn’t everything, and your salary definitely isn’t everything. It’s always wise to consider opportunities for growth at your current employer, commute time, stress level, benefits, and how realistic it would be to relocate. Do this while you’re young, and you’re more likely to enjoy higher salaries throughout your working career.
The point isn’t to jump from job to job until you have a 10 page resume, but to find a job where you enjoy the work you do while moving you further along to the right hand side of the charts above. After all, it’s easier to invest more money when you make more money.