You’ll miss out on ‘free money’ years if you wait until these ages to start saving for retirement

If you don’t start saving for retirement by age 40, you may need to rethink your long-term plan.

At those ages, putting more money into your retirement savings down the road may not be enough to see you through your later years the way you think, says Anne Lester , retirement expert and author of “Your Best Financial Life: Save Smart Now for the Future You Want.”

At age 40, “you really have to start thinking about solving this challenge in more than just knowing how to save more,” he tells CNBC Make It. “You have to keep earning or stop eating or completely change what you eat in retirement.”

That may include making major changes to your retirement lifestyle, such as downsizing your home, moving to a cheaper area, not commuting as much, or working longer hours. .

“You take away options for the future if you don’t save when you’re young,” says Lester.

Benefits of saving money for early retirement

About a quarter, 26%, of Gen Z workers, defined as those between the ages of 18 and 27, did not contribute to their retirement savings in the past year and are no longer contributing currently, according to the latest data from Bankrate.

In your 20s, your finances may be too thin to set aside much for retirement, Lester says. That’s fine – but don’t wait until it’s gone.

“When you’re in your 20s, losing a year isn’t such a big deal,” he says. “But one of the tragedies of losing those early contributions, especially if it’s a 401(k) and there’s a corporate game, you lose free money and you can’t get it back.”

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When you start saving for retirement early, your money has more time to grow through the power of compound interest. In addition, you need to contribute a smaller percentage of your annual income than if you started contributing in old age.

Experts generally advise setting aside 15% of your annual salary, including any company match. However, that percentage jumps to 25% or more if you wait until you’re 40 or older to start, Lester says.

Say your goal is to retire with $1 million by 65. If you start contributing at age 25 and earn a 7% annual return, you’ll need to set aside $381 per month to achieve your goal, according to CNBC figures. But if you start at 40, you’ll need to save about $1,234 a month to reach the same goal.

While it may still be possible to reach that $1 million goal by starting later, it would take too much money to do so, which may not be possible.

“If you wait until you’re 40 to start, you’ve lost about two decades of money,” says Lester.

Finally, setting aside even a small amount of money for early retirement can pay off twice. For one, you give your money a longer period of time to grow. And second, you get into the habit of saving, which makes it easier to keep doing so in the long run, Lester says.

“You start to build the muscle of saving money, and gradually it becomes less scary, less scary, less scary,” he says. “You start defining yourself as a saver and invest, and set yourself on a lifelong path to having options as you grow.”

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