I’ve written many times about various things you can do in order to maximize the chances that your post-retirement life turns out to be everything you’ve hoped it could be.  What is the number one thing you need to do?  In a word, save!  And I mean save early, save often, and save as much as you can.  But rather than just saying it, I thought I’d give you some examples that may help you really appreciate the impact a good savings plan can have on your future.

Let’s approach this first in dollar accumulation terms.  Let’s say you never saved a dime until you turned 45.  You wake up on your birthday, take a good look at yourself in the mirror, and conclude that you really need to start saving for your future.  So you diligently begin putting away $100 each month into your 401(k) plan until you retire at age 67 (your Social Security’s retirement age).  Assuming you were able to make 5.5% each year on your investments, how much do you think you will have accumulated?  A paltry $51,000.  Not even enough for a daily cup of coffee at Starbucks through your eighties at the expected rate of inflation.

You now go back in time and visit your younger self on your 35^th birthday.  You implore him (you) to start saving immediately; otherwise you both will be paying the price when you retire.  After getting over the shock of meeting an older version of himself – not to mention how decrepit his older self appears to look – your younger self agrees and starts saving $100 each month beginning the very next day.  Assuming the same return on the investments, that additional ten years will pump up the total savings to $104,000.  A bit better but not yet enough to do much with over a 20 or 30 year retirement lifetime.

So you both get together and visit your 25 year old self, who has trouble accepting the fact that either of you are the least bit related to him.  You both finally persuade him that you really are him (or vice-versa), and that the time to start saving is now rather than later.  He agrees, albeit a bit reluctantly, and starts saving that $100 per month, giving up some of those expensive pleasures that you all enjoyed when you were young.  Now you go back to 2013 feeling more sanguine, knowing that when you retire you will have accumulated almost $200K for your retirement.

Think those numbers are too small?  It all depends on (1) how much you save and (2) what kind of return you can get on your investments. You might be able to save more over time if you get better jobs that pay more.  And past returns (that is, back when you were age 25 and 35) were on average better than 5.5%.  Suppose you were able to get a 7% return instead?  You would then accumulate over $300,000 over your working lifetime from just that $100 monthly savings you began at age 25.

Let’s look at this another way.  Think of your savings as being able to provide you with a monthly check during your retirement. Suppose you put away $100 a month starting at age 25, and increase your savings by 1.5% each year.  When you retire at age 67 you’d be able to pay yourself $600 per month for the rest of your life.  That’s a six to one return on your savings.  And that’s assuming a 5.5% return on your investments each year.  With a 7% return, your “pension” would increase to $1000 per month.

Of course, there are lots of assumptions in the numbers above.  And they don’t tell you how much you need to be saving.  It’s hard to balance our needs while we’re accumulating wealth against our needs after we’ve retired.  That’s why I’m always harping about the benefit that a goals-based retirement plan (or future plan or financial independence plan, whatever you call it) can provide.  It puts all our financial decisions in the context of our entire lives, helping us make more informed tradeoffs.  Who wants to turn into that eighty year old who is ready to throttle his thirty five year old younger self for having made so many selfish financial decisions in his past?