Six Ways to Boost Your Retirement Fund by Six Figures
The miracle of compounding rewards wise decisions made early in life
About to make a purchase or other financial decision?
Ask yourself, if I don’t spend this $100 on, well, whatever, what might I do with the money instead? That second, foregone, use is the opportunity cost — what you can’t do with the money once you’ve spent it.
And becoming someone who automatically considers the opportunity cost is the path toward a more abundant, easier retirement.
Consider: You have $1,000 for the iPhone upgrade, so you go for it. But might you keep your perfectly fine phone for another year or two, and put the $1,000 toward your student loan? Or spend it on the vacation you think you can’t afford; chances are the photos with the old phone will be just as social media ready.
Opportunity cost becomes absolutely eye-popping when the alternative to spending a dollar is to invest that dollar for a future goal.
Buy the slightly smaller house.With interest rates so low, it’s tempting right now to buy the bigger house with the extra bedroom. But a recent analysis found the typical four-bedroom home cost about $100,000 more than the three-bedroom.You can use an online calculator to plug in the particulars of home prices in your area to estimate the difference in monthly mortgage costs for bigger or smaller homes.
Now take that monthly difference, and think opportunity cost. Let’s say it’s a $300 monthly difference. You invest the $300 for 30 years (the length of your mortgage) and earn a 5% annualized return. Voila: That’s $250,000 in retirement savings. At a $600 differential (common in high priced markets, such as Boston), the savings would be $500,000.
Buy the used car. Drive it longer. Car buying is a huge opportunity cost challenge. The three-year-old used car is the far better “investment.” Lower payments that you can get paid off faster mean more months with no car payment.
A five-year stretch putting $430 a month into a Roth IRA instead of a car payment (if the money grows at an annualized 7%) means more than $30,000. Keep that money growing in the Roth IRA for another 25 years — with no new contributions — and the fund will be worth more than $165,000. BTW, that’s $165,000 in tax-free dollars to spend in retirement.
Don’t be lavish on your kid’s extracurriculars. Whether it’s a team outside of school, or a coach, it’s not uncommon for parents to spend $500 a month on one child’s hobbies. If you saved, rather than spent that money, for 10 years and then kept the money compounding, you might have an extra $200,000 in 30 years.
Raise a money-wise kid. Save $100 a month starting at age 25 and keep it up until age 65 and you will have $1.1 million, assuming a 7% annualized return. If you wait until age 40 to start saving, to end up with the same $1.1 million at age 65 would require saving $300 a month.
The younger saver contributes $208,000 of their own money, with compound growth doing the work. The 40-year-old saver will need to use $390,000 of their own money. That’s the opportunity cost of not taking fuller advantage of the time factor that propels compound growth.
Negotiate your first salary. An analysis by ZipRecruiter estimates that starting at $45,000 rather than $40,000 will continue to ripple throughout all subsequent jobs and raises, and over a career can add up to more than $750,000.
You lose more than salary when you leave work. Whether it’s a temporary exit to raise young kids for a few years, or taking time off to care for elderly parents, the compounded loss of salary, wage increases, retirement benefits and Social Security benefits can add up to hundreds of thousands of dollars in lost retirement security. A $60,000-a-year worker taking five years off can wind up $900,000 poorer, in all. Use a calculator to estimate the penalty of leaving a job.