Don’t Wait Too Long

When it comes to saving for retirement, let’s face it: Procrastination isn’t unusual. Now, a new study quantifies just how pervasive—and costly—such behavior can be.

According to a survey released Tuesday by Financial Engines, 68% of adults ages 55 and older admit to having gotten a late start on their retirement savings.

While, on average, the 968 respondents said 25 was the right age at which to start saving for retirement, they report having taken action 10.6 years later, at 35. Reasons for the delays include the usual suspects: other priorities (40%), confusion over how to get started (23%) and difficulties setting aside the money (20%).

What’s the big deal about delaying? It turns out that making up for lost time isn’t easy. In fact, according to Financial Engines, which provides professional management for 401(k) accounts and individual retirement accounts, someone who saves 6% of a $36,000 salary (that grows by 1.5% a year) starting at age 25 will have close to $500,000 by age 65, assuming a 3% employer matching contribution and a 5% annual return.

But to reach the same target, someone who starts saving at 35 has to contribute 12% a year. For someone who starts at 40, the magic number is 16.5%.

“When it comes to financial planning, it’s really easy to put it off because you won’t feel the pain until you are ready to stop working,” says Mike Jurs, a spokesman at Sunnyvale, Calif.-based Financial Engines. “But procrastinating can really cost you—and the sooner you start the better off you will be.”

The reason comes down to one word: compounding.

One dollar saved in stocks or bonds today earns a return, typically positive, that in subsequent years also earns a return that builds over time. Or, put another way: “They’ll need to save enough to make up for missed past contributions, their missed 401(k) matches and any missed investment growth,” says Financial Engines.

What if you get off to a slow start, rather than punting on saving entirely? For example, what if you save 4.5%, combined with your company match, from age 25 to 34, rather than 9%, as in the example above? In that case, you’d have to save 9% a year from age 35 on—or a total of 12%, when a 3% company match is added on top—to reach a $500,000 goal by age 65.

The bottom line: “If you have procrastinated, you are not doomed,” Mr. Jurs says. “You can still catch up. It’s just going to cost you more.”