Retirement saving has an image problem. Actually, it has two image problems.
The first is with “the number.” The thought of saving $1 million or more for retirement is overwhelming. For those just trying to make ends meet, amassing more money than they can imagine seems as likely as the Washington Redskins winning the Super Bowl. As a result, many people don’t even try.
The second image problem is much smaller, but equally paralyzing. The thought of saving $100 a month in a retirement account seems pointless. How can such meager savings turn into an amount that would allow a typical family to retire?
Add to these two image problems the fact that retirement is decades away for many people, and the result is a retirement readiness epidemic. These problems hit home to me when, as part of a 31-day money challenge, an executive in the pension industry commented that just the cost of cable TV and cell phones could fund a retirement.
I decided to test his idea.
Cable TV or retirement – you decide. How much does a lifetime of cable cost? While the cost of monthly cable packages varies significantly, the average is about $80 a month. Multiply that cost by 50 years and it totals a whopping $48,000. If you think that number is alarming, wait until you see the next one.
If you invest that $80 a month in a low cost S&P 500 index fund that returns 8 percent annually, the amount grows to an eye-popping $638,000. That’s a lot of dough to pay for 500 channels of TV most people will never watch. If you can bump up your returns to 9 percent, the number grows to almost $1 million.
The beauty of compounding. The numbers seem almost mystical. Most people can wrap their minds around turning $80 a month into $48,000 over 50 years. It’s the jump to $638,000 with just an 8 percent annual return that’s mind-bending. We can thank compound interest.
The effect of compounding returns is the critical ingredient to retirement readiness. The good news is that it doesn’t take a lot of money. However, it does take a lot of time. The key is to start investing for retirement as early as possible. While you’re still in high school would be a good place to start.
How to keep cable TV and still retire. I mentioned this topic to my wife, and her response was immediate: Some people don’t want to wait 50 years to start living. While I might debate whether cable TV is necessary to “start living,” she makes a valid point.
However, the reality is that most individuals and families spend money each month in ways that do not add meaningfully to their quality of life. For some people it may be cable TV. For others it may be a cell phone package they don’t need, high interest rates on debt they could refinance or an expensive car. Figure out what you are spending money on that doesn’t increase your happiness if you are interested in a way to reduce your monthly spending without sacrifice.
Rob Berger is an attorney and founder of the popular personal finance and investing blog, doughroller.net. He is also the editor of the Dough Roller Weekly Newsletter, a free newsletter covering all aspects of personal finance and investing.