The standard saving and retirement advice is to save the maximum amount of money until the very day you are ready to retire. Then, retire and start living off your savings.
But is this the "best" solution? "Best" in this context is a bit more than just "final value of your portfolio". There is this little thing called life that happens while you are saving money for the future, and it would be a shame not to maximize every year of that.
For a specific example. I like to ski. I am also 50. While I still hope to ski when I'm 55, I know it will be just that little bit more difficult, the day after will be a bit more sore, and I might not be able to ski the exact slopes I could this year. I could take the money I would have otherwise saved for retirement this year and spend it on a once in a lifetime ski trip, or I could save it as I always have.
It's a different take on "opportunity cost".
Time to run some numbers.
The Numbers
Assume:
$100K Salary, 10% savings rate, 10% rate of return, you want $1 Million in savings.
You contribute new savings every year
Result:
You pass $1 Million in savings in year 26.
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Now with the same assumptions, except that you stop new contributions to savings at year 20.
Result:
You pass 1 Million in savings in year 26.
Nope. I didn't mess up the math here. It's simply that after a time, the amount of gains you achieve is being more and more driven by the compounding interest and not by the new savings you are adding every year.
(To be totally honest, yes there is a difference in the final amount at the end of 26 years, but this is the difference between $1,092,000 and $1,014,000.)
Try for yourself
Want to play with the numbers yourself?You can download a copy of the spreadsheet here