Remember the way simple word problems helped you grasp abstract mathematics when you were in grade school? The same principle applies to retirement planning:
Steven spends $5 per day on an extra-large coffee during his morning break at work. If he works five days a week, with 20 days off per year, how much does Steven spend annually on his morning coffee break?
With retirement planning, as with grade school math, small numbers can sometimes add up to bigger numbers once you’ve solved the whole equation. Conversely, the lump sum that you’re going to need for retirement becomes a lot less intimidating if you think of it as a collection of small savings that accrue over time.
Take that coffee money. Let’s say Steven is 27 years old. What if instead of buying coffee every morning he vowed to bring in his coffee from home, beginning today, and instead invest the money he used to spend on extra-large coffees into his 401k? What would that add up to by the time he reached retirement age?
The results might surprise you.
Besides providing a long-term financial benefit, bringing his coffee from home instead of buying it could also provide an immediate short-term benefit in the form of reduced stress. Studies have shown that 3 in 10 workers worry about finances while at work, and 53% say that retirement planning programs at their place of work could increase their productivity.2
1. The example above assumes a 5% rate of return and a $1200 contribution made at the end of each year. This illustration is hypothetical, is not guaranteed, and is not intended to reflect the performance of any specific investment.
2. Harvard Health Publishing/Harvard Medical School
3. This information assumes that Steven participates in a 401(k) plan that allows for participants to defer contributions to the plan from their paychecks.