The Most Important Decade for Your Retirement

By Chuck Saletta

Time and money are the two critical components of any retirement investing strategy. If you make the best use of both by saving early and often for your future, the odds are you'll do just fine.

Unfortunately, things don't always work out that way. When we're young enough to put the full power of time on our side, we tend to also be too broke to fund our retirement accounts. And by the time we've hit our peak earning years and have some significant spare cash, we've run out of time to let compounding truly work its magic.

Life happens
Not only that, but life also has a habit of getting in the way of all of our best intentions to fund our retirements. When we're just starting out, we've got to worry about student loans; buying, furnishing, and fixing up a house; getting married; starting a family; and on and on. And as we progress through our careers, our concerns may come to include things like funding our children's educations, caring for our aging parents, and other critical priorities.

There are and will always be demands on your money. And those demands make it very difficult to reliably contribute to a retirement plan throughout your entire working career. If you could carve out a very special decade of your life, though, and really make your retirement your priority for that decade, it just might provide all the savings you need.

Your power years
That decade is your 30s. If, from your 30th birthday through the night before you turn 40, you make a commitment to maximize your retirement savings every single year, it just might be enough. Your 30s are a critical decade for your retirement for a number of reasons:

• You're still young enough to let compounding really work its magic.
• You've likely been through the costly parts of starting up your life.
• You've probably established yourself well enough to be beyond an entry-level salary.
• Your children are probably not ready for college.
• Your parents are probably still young and independent.

That gives you a tremendous window of opportunity to funnel as much useful cash toward your retirement as you possibly can.

The benefits
Under 2007 rules, 30-somethings with earned income can contribute up to $15,500 per year to an employer-sponsored 401(k), and an additional $4,000 annually to an IRA. That's $19,500 per year in total. Assuming you contribute that much and earn about 10% per year (around the market's historical average), you'll wind up with $310,779.78 on your 40th birthday. If you never contribute another dime but just let that cash compound in your retirement accounts, here's what you'd end up with along the way:

 

Age	Account Balance
40	$310,779.78
45	$500,513.94
50	$806,082.71
55	$1,298,204.27
60	$2,090,770.95
65	$3,367,207.53
67	$4,074,321.11
70	$5,422,921.39

Thanks to the power of compounding, by the time you hit retirement age, the money you saved in your 30s can take you far. If you wait until you turn 40 to start, even diligently saving $19,500 per year up until age 70 still wouldn't give you an account balance nearly as high.

You don't need to pick the best
Probably the most powerful part of this plan is that you need only to match the market's historical returns to be successful. As a result, any number of stocks behind fundamentally strong companies would have gotten you there over the past three or so decades:

 

Company	Share Price on 8/24/77	Share Price on 8/24/07	Dividends/ Spinoffs Earned	Total Annualized Return
Coca-Cola (NYSE: KO)	$1.66	$54.00	$12.55	13.09%
PepsiCo (NYSE: PEP)	$1.46	$68.22	$14.12	14.39%
Altria (NYSE: MO)	$1.28	$69.19	$55.03	16.48%
Citigroup (NYSE: C)	$1.60	$48.50	$14.00	12.99%
United Technologies (NYSE: UTX)	$2.23	$74.33	$10.00	12.88%
General Electric (NYSE: GE)	$1.13	$39.41	$9.96	13.43%
American Express (NYSE: AXP)	$3.41	$60.89	$17.27	11.01%

All data split-adjusted

You didn't need to pick the winner in the cola wars (Coke or Pepsi) or the credit wars (American Express or Citigroup), or even the winner among conglomerates (General Electric or United Technologies). Over the past three decades, all of those competitors surpassed a 10% annual return and would have let you retire comfortably.

Keep time on your side
Life will always try to get in the way of your retirement planning. Your 30s are likely the years that'll give you your best chance to retire successfully.

© 2007 Universal Press Syndicate.