But they put the same amount in total, so it’s neither suprising nor impressive that the one getting interest longer ended up with a little more.
That is indeed my point. When people say “there’s no point saving when you’re 20 if you can’t put away a lot” they are dead wrong. By gaining the advantage of compounding they are getting something “for free.” And it probably felt harder for Mr. S@30 to put away more from every paycheck.
While I agree with the general idea of saving as much as you can, and saving regularly, the benefit of saving early isn’t quite as great as is made out, because often these calculations don’t take into account the rate of inflation or the time-value of money.
If you’re earning 5% on your investments, and the average rate of inflation is 3%, then your real rate of return is 2%.
And a dollar that you can spend today has much more value than a dollar you can spend in 40 years. The interest you earn on your investment is essentially paying you for allowing that money to be used by someone else for 40 years. There are plenty of circumstances where the money would be better spent today than saved for retirement - for example, if your retirement savings prevent you from starting a small business, or from buying a home, or from paying your kid’s education, then it’s a net negative.
You also have to discount retirement money because of risk - risk that your investments will collapse, risk that you’ll die before you get a chance to spend the money, risk that the government will tax it into oblivion, risk that rampant inflation at some point will wipe out the real value of your investments.
So… it’s important to save, but only within reason. If you’re making serious compromises in your lifestyle and seriously limiting your choices at age 30 in order to save for your retirement at 65, you’re going too far.
One other thing - if your savings are going into a company 401(k) plan and invested in company stock, diversify. Don’t put yourself in a situation where, if your company goes under or takes a strong nosedive, you won’t lose your job and your savings at the same time. My company is one of the biggest in the world, and has lost 2/3 of its stock value in the last ten years. Those employees who had all their savings in company stock and then got laid off in the recession have been devastated. Don’t do that.
Reminds me of the fable of the ant and the grasshopper. 
This is important advice.
Also, the minimum you should put in your 401(k) is the amount that your employer will match. For example at my company we get a 35% match on the first 5% of our income we save, so that’s an immediate 35% gain before adding investment returns, and not counting the tax savings.
After this minimum amount you can save elsewhere if it makes sense, but if you’re not getting the whole match you’re throwing away free money.
And diversify. It shouldn’t all be in stocks. Especially if you are older than 40 or so. You want investments that exceed the rate of inflation, but you don’t want to be in the highly volatile stock market for 100%.
I’ve met too many 25 year olds who can blow $100 at the bar on Thursday night happy hour or have two kids but continue to smoke a pack a day to really buy the “I can’t afford to save” line from most people. For most people who don’t invest in retirement, they are CHOOSING not to save. Maybe they won’t manage to save much, but even now, Social Security is pretty much survival income and not much more. It would be nice to have saved enough to afford some luxuries in retirement.
Ditto. When I worked for AT&T I put half my money in AT&T stock - which out-performed the more general fund I had by the time I had left. But I was very lucky and never made that mistake again. I know some people from IBM who got laid off just when the stock was low, and so got doubly hit. You are betting on your company just by working there - you don’t need to double down. And your 401K investments should be as diversified as your other investments. When I had to change them, I consulted with my financial planner about the best choices.
Yet another problem is when you change companies. I have a pension that is now owned by Alcatel/Lucent. It still exists, but since it is set based on my salary 15 years ago when I left, I’m not even including it in my retirement plans. My 401K from that time, on the other hand, has been moved under my control and is doing very well.
This might be over-conservative. When you retire your spending is not constant. Right after you retire you might spend a lot on the travel you have been putting off or a move to a more reasonable house. But as time goes on you are likely to reduce spending. I’ve seen this for my father and my father-in-law. If you make it to 90 you don’t want to travel, and the need for things gets very reduced. You do have to take long term care into account, but if you are 95 and not an Astor your ball gown budget will be way down.
Here are some figures for the ‘eyeopener’ I mentioned above. IMHO, some real-world figures will be better than a ‘little more’.
Over the last 60 years, the REAL S&P return has been 7% after inflation. There have been bad years, even decades - but we are talking about saving for the long term, so I picked the 1950-2009 figures here.
Using a 7% return, if Person A, 20 year old, puts away $100/month for 10 years and stops, the total investment is $12,000. Person B, a 35 year old, does the same but for 30 years, their total investment is three times that $36,000. At age 65 would have:
Person A : $189,406
Person B : $122,488
Compound interest is important.
Well, I don’t wear ball gowns now, so I can eliminate that budget 
I admit it is conservative, but my family is long-lived and I expect to have to spend a lot on medical and long-term care because of that. Running out of money is not something I want to do and since I don’t expect to see socialism in this country, I can’t count on the government to care for me the way I want to live.
I got a chuckle out of this sentence. Thanks.
It should be noted that if you’re an Astor, you probably aren’t soliciting financial planning advice on the SDMB.
However, when you’re 90 you might want a motorized wheelchair, or to move into an expensive assisted living facility, or you may have a spouse who had a stroke and now needs to live in a nursing home. If you’re still driving when you’re 80, you might need a special vehicle with a wheelchair ramp for you or your spouse. You might also need renovations to your home to support a partial or total handicap, and you might have to hire people to do routine maintenance you used to do yourself.
If retirement is a long way off, there are no doubt going to be a whole host of new medical treatments and/or technologies for making life better that you’ll want to buy. Wouldn’t it suck if there was a new drug therapy for restoring brain function in the elderly, or new technologies for regrowing worn-out joints, and you couldn’t afford them? You can bet that even government health care will not give away every expensive, non-life saving technology.
Not to make this too political, but if the government becomes the provider of health care, you can expect that quality-of-life treatments or devices will either be unavailable to you or will have waiting lists that you may not want to sit on. My grandmother in Canada waited years for joint replacement surgery - years of agony and an almost complete inability to walk. In all socialized medical systems, it’s the quality-of-life medical care for the elderly that tends to suffer. So you would like to have enough extra money to pay for some of these things yourself - or, maybe sure you have a good health care plan today that will cover you when you’re old and includes such treatments.
If you wind up in assisted living or a nursing home, a few hundred bucks per month extra can make the difference between living in a room with three other people or having a nice little private room. If you’re going to be stuck in a facility for ten or twenty years, you’d rather have a little privacy.
So don’t assume your expenses will be lower.
For us, our first line of retirement defense is our home. Our plan when we retire is to sell it and move into a smaller place, which will net us several hundred thousand dollars for use in retirement (it would have been more than half a million a couple of years ago, but hey… real estate…). That’s the nest-egg for unforeseen expenses and for nursing homes or whatever critical things we might need. Whatever’s left of that at the end will be our daughter’s inheritance.
Other than that, we plan to budget our living expenses on the combination of our corporate pensions and our government pension, and use our retirement savings for luxuries like trips and keeping up with technology.
We’re lucky in that my wife has an excellent pension and has been working under the same plan for about 25 years already, and she has at least another 10-15 to go before retirement, so she’ll retire on a 70% income pension or something close to that. I’ll probably manage about half that from my corporate pension, and both of our plans have supplemental health care coverage we’ve been paying into from day one that will still apply in retirement. Add in the government pensions, and we’ll wind up without almost the income we have now, even absent any further savings.
There are lots of ways to prepare for retirement.
I should have moved to Canada
Thirty years in 3 different software firms and none of them offered a pension.
I find this strange each time I hear it. My parents got their house to…wait for it…live in. Period. Of course, they also accumulated a respectable seaprate retirement fund, so there’s that. (And it was then cut in half by the stock drop. But still, no house selling.)
I don’t know how rare their approach is - perhaps very rare. But still, hearing that people are spending 30 years in a house just so they can dump it seems very strange to me.
Mine have six bedrooms that are used when my sisters and family comes into town, but the house is something they really can’t keep up long term. My dad retired last year, and there are probably five more years in the house - when they will move to something smaller with less yard - probably a townhouse or condo. Its the house I grew up in and remember, but there aren’t kids at home any more, they don’t need all that house.
Being aware of this is part of their retirement planning, they know the delta between the house they are in and where they are likely to spend the following years before they require assisted living. And that is part of the assets they will spend down.
My folks ‘dumped’ their house, not because they needed the money, but because they had a huge house, and when my brothers and sisters all moved out they were sort of rattling around in it. They wanted something smaller that was easier for them to maintain and care for.
I also don’t know how unusual or common this is, to be honest. My dad always was a demon for saving money and investing, teaching all of us to max our 401K’s and diversify our investments, and it’s really paid off for them. Even though neither of my folks ever even went to college, and despite being born into what would be abject poverty here in the US, they made their ‘magic million’ years ago, and are now comfortably living on the proceeds, without any worry about money at all.
I guess I just don’t get some of the attitudes in this thread that it’s better to spend now than to save for the future. My folks are both in their 80’s now, and my dad still goes skiing and plays golf, and, baring some kind of accident, I’d say he’ll still be going strong a decade from now…or even two, the old bastard is seriously tough, and frankly if I were death come to gather him in I’d be seriously wary of crossing him. 
-XT
I don’t think what you heard is what Sam said.
Seriously, we’re in the same situation. We have a six bedroom house which we’ve lived in for the last twenty-five years. Raised our daughters here. Great house, great lot, great neighborhood. We didn’t buy it to live in it for thirty years and dump it, we bought it to live in, and life’s been great.
But now it’s ridiculously too large for the two of us. We’re rattling around in it like two bee-bees in a boxcar. We’ve started to think in terms of selling it and moving into a nice little cottage somewhere farther away from the nice public schools and closer to the nice golf courses.
(and the extra cash helps, too.)
Or the Republicans get their hands on it again.
This is exactly it. Our house is very nice, and we love it. But it’s a lot of work. We have a very large yard, lots of landscaping, and 3,000 sq ft of living space. But there will come a day when we don’t want to walk two flights of stairs to get from the basement office to a bedroom, and we don’t want to clean and maintain this place. So we believe we’ll be selling the house somewhere into our retirement and moving into a smaller place. Renting or buying, I don’t know.
Knowing that this is what is likely to happen, you simply factor that in to your retirement planning. I’m not sure why it’s supposed to be a strange thing to do. Perhaps some people come from a perspective where houses stay in the family for generations, or where the parents never moved up to larger homes as their family grew - homes that will be the right size once again when they’re retired. But that’s not everyone.