Personal finance expert Liz Pulliam Weston

The Basics

Yes, you will live to be 80

When you're young, retirement seems an eternity away. But if you don't start saving now, you'll miss out on the money magic that will make a huge difference later.

By Liz Pulliam Weston
MSN Money

The young have a hard time imagining being old. The old have a hard time imagining how time could have flown so quickly.

So every time I hear 20-somethings suggest that they're not likely to live to retirement age or that they have plenty of time ahead of them to save for it, I have to answer: Yes, you are, and, no, you don't.

It boils down to math: life-expectancy math and the magic of compound returns.

Let's take life expectancy first.

At birth, a male's life expectancy in the U.S. is about 75 years, while a female's is nearly 80. Those expectancies inch up over time. The longer you live, in other words, the longer you're expected to go on doing so.

Remaining life expectancy

Age

Male

Female

Birth

74.81

79.95

10

65.53

70.58

20

55.87

60.74

30

46.6

51.03

40

37.3

41.45

50

28.49

32.24

60

20.42

23.53

70

13.3

15.69

80

7.62

9.16

Source: Social Security Administration

You might think you're some kind of exception, but odds are you're not. Consider:

  • Out of 100,000 live births in the U.S., 79,061 males and 87,051 females live to age 65, according to Social Security actuarial tables. In percentage terms, 79% and 87% are synonymous with "the vast majority."
  • By age 75, 60% of men and nearly 73% of women are still alive.
  • Sixty percent of women are still alive at 80, while the percentage of still-kicking men drops below half after age 78.
  • More than half of women are still alive at age 83.

In short, the odds are very good that you'll survive until traditional retirement age and many years beyond. Social Security will provide only part of the money you're likely to need. The average monthly benefit check for retirees in December 2009 was $1,063 ($1,311 for men, $1,011 for women).

Unless you can live on that, shivering through your last years in a threadbare cardigan, you'll have to figure out a way to set aside some money for your old age.

You don't need $1 million

According to the 2009 Retirement Confidence Survey (.pdf file) by the Employee Benefit Research Institute, a nonprofit organization that tracks 20 million 401k accounts:

  • 64% of workers 25 and older have less than $50,000 saved for retirement (excluding their homes and any pensions).
  • 40% of all workers have less than $10,000 saved.

Fifteen years is a long time to cover without paychecks, and you might need to pay for an even longer period if you retire earlier or live longer. (Use MSN Money's Life Expectancy Calculator to get a customized guess of how long you'll last. If you're in good health with good genes and good habits, you might be surprised.)

The amount you'll need depends on a number of factors besides how long you'll live, including whether your house is paid off, what you'll get from Social Security and pensions, and the return you get on your investments, among other factors. (You can play with MSN Money's Retirement Planner to get some idea of the variables.)

Only two things are certain:

  • Even $10,000 is better than nothing.
  • The less you have saved, the greater the power even a modest nest egg has to change your living standards.

Start now, today, this minute

Regardless of the sum you aim for, the earlier you start, the easier it will be to achieve.

Let's say you're trying for a $250,000 nest egg. If you start at age 25, you would need to set aside $61 a month to meet your goal of retiring at age 67, assuming 8% average annual returns (a reasonable assumption, given a diversified portfolio, a tax-sheltered account and historic returns).

Wait just 10 years, though, and you would need to put aside more than twice as much: $141 a month. If you delay until you're 45, you'll need to save nearly six times as much -- $349 a month -- to reach your goal. At 55, the monthly tab would be a whopping $1,039.

You can play around with some scenarios using MSN Money's Aim to Save calculator. (You can type in any rate of return you like. And if you'll be doing your saving within a 401k or a traditional individual retirement account, you can type a zero into the tax-bracket field.)

What this illustrates is the effect of compound returns. The money you invest earns returns, and then those returns earn returns, and so on. Even small amounts can grow to whopping sums over time because of this effect.

Continued: Time works wonders

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