For young people just getting their careers off the ground, saving for retirement can often feel like an exercise in futility.



There are bills to pay, debt to be tackled, apartments to rent, and social lives to be had. It’s baffling to imagine putting a piece of our precious paycheck in an account that’s designed to keep us from touching it until we’re old and gray. That money, we tell ourselves, would be far more useful in our pockets.

That line of thinking is precisely why people like David Marotta, president of Marotta Wealth Management in Charlottesville, Va., stay in business.

In a recent blog post, Marotta offers a sobering example of just how little buying power the cash us 20-somethings earn today will have when we’re ready to retire:

Someone retiring now in 2014 with $1 million at age 65 can safely withdraw $43,600 a year. However, [because of inflation], today’s 20-year-olds will need over $7 million to have that same lifestyle when they retire. In 1970, they would only have needed $166,000 in retirement to have a similar purchasing power for the rest of their life.

[For this calculation, Marotta assumes an average inflation rate over the next 45 years of 4.5%.]



To get close to saving $7 million, a 25-year-old with a starting salary of $50,000 would need to save about 14.65% of their salary throughout their career (see Marotta's math here).

To be fair, Marotta's estimate is conservative — the U.S. inflation rate is currently at 1.5% and hasn't been close to 4.5% since 2008 — but not outlandish. Marotta and other experts say it's too risky to assume inflation will remain as low as it has been for the long-term. The average inflation rate since the 1960s is just above 4.5%.



"Using current year inflation rates for long term planning is like using last year's U.S. stock returns (33%) for long term averages," he says. "Economics classes have to memorize long-term interest rates for planning purposes which average over 4% (4.5% to 4.1%). I don't think I'd want to use any rates outside of that range for ... long-term retirement planning."



If we use the 10-year average for inflation, however, which has hovered around 3%, a 20-something would need to need to save about $4 million to have as much buying power as someone retiring with $1 million today. (Not exactly chump change but...phew.)



Like any form of financial planning, predicting future savings and earnings requires as much math skill as it does crystal ball reading. In other words, it's not an exact science, so try not to freak out too much.

Whether or not you’ll need the equivalent of $1 million today in your golden years is going to depend on a lot of factors — including your lifespan, expected lifetime earnings, and your standard of living.

But Marotta's central message here is inescapable: “Inflation is almost guaranteed and it is the risk that has the biggest effect on people saving for retirement,” he says. “And yet, it’s the one most young people overlook.”

Time is on your side

The average Gen Yer (defined in this case as workers 23 to 35) today saves about 6% of their pay and has a little less than $20,000 invested in a retirement fund, according to data compiled by Fidelity for Yahoo Finance.

By comparison, savers aged 36-64 put away more than 8% of their income and have saved nearly $90,000



The good news is that 6% for a 25-year-old with 40 solid working years ahead of them is probably just as — if not more — valuable than 8% for a 55-year-old a decade away from retirement.

“The money you earn when you’re young is more important than the money you earn when you’re older,” Marotta says. “Even saving $100 a month or $10 a month or something ridiculously low is the right place to start.”

Let’s use a fictional saver, Jennifer, as an example. She’s 22 years old earning $3,000 a month and decides to save 5% of her (pre-taxed) salary in a 401(k). She gets a 5% match from her employer, so she’s putting away a total of $300 a month ($150 with each bi-weekly paycheck). If she puts that cash into an index fund earning 6% a year — even if she never gets a single raise or promotion — she will have saved $753,849 by age 65. (Run your own savings estimation using Bankrate.com’s savings calculator.)

Now, let’s say Jennifer decides to wait to start saving for retirement until she’s managed to work her way up and feels more financially stable. By age 35, she’s been promoted twice and has doubled her income to $6,000 a month. She uses the same savings strategy (5% of her own cash plus a 5% employer match for a total of $600 a month).

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