Making Over Ron
Aug. 20 -- Ron worries his low salary will make it hard for him to retire comfortably. But you don't need money to plan shrewdly, as Ron's proving as he plots a secure retirement.
Ron has two important things going for him — discipline and time. In combination, they give him a head start on building his retirement nest egg.
Ron shows extraordinary discipline — he's saving between 20 percent and 30 percent of his annual income. For perspective, Americans typicallly save less than 5 percent, and the overall savings rate has been negative in recent years, meaning Americans, as a whole spend more than they earn.
Since Ron is just 26, his investments have 40 years to grow before he'll tap them for living expenses.
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An example best illustrates how discipline and time will help Ron reach his goals. Let's say he works until he's 65 and that he'll spent the equivalent of $21,000 a year (about what he spends now) during retirement. If his expenses grow by 3 percent a year, Ron will need to accumulate about $1.3 million by age 65 to fund his living expenses until age 90.
Saving $1.3 million on Ron's salary may seem unatttainable, but it's well within his reach. If he continues to save 20 percent of his gross income each year, and his investments earn an 8 percent average return, he'll have a $1.9 million nest egg by age 65.
Of course, he'll owe some taxes on this, but he'll still have enough left over to retire. Plus, he'll have his Social Security income and perhaps a teacher's pension.
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