When it comes to saving for retirement, is there really that big of a difference between starting to save now and waiting?
YES!
In your 20’s, retirement might feel like it is very far away. You’re just at the beginning of your career and you have other bills to pay, high rent payments, and might not be making a lot. You might be asking yourself-can I really afford to begin saving for retirement? Why can’t I just start doing it in my 40’s?
If you ask any of our clients what the one thing they wish they knew in their 20’s when it came to saving for their retirement, it would be how important it was having time on their side. If they had put away more when they were younger, before they had children or began paying mortgage payments, they would not have to contribute as much later. Even a small amount saved now, can help you substantially for your future.
The number one reason to begin saving now
The most important reason to begin saving for your retirement as early as possible is because of compounding. According to Investopedia, compounding is “the process by which a sum of money grows exponentially due to interest more or less building upon itself over time.” What this means is that each year your investments grow, not only on the amount you add into your account, but also on the amount that is already invested.
Let’s break it down
Let’s say you invest $100 into your retirement account. Over the year your account grows by 5%, leaving you at the end of the year with $105. If your account gains 5% again the following year, you will now be gaining the 5% on the $105, not the base amount of $100, so you will now have $110.25. If you added no additional money to your account, and just watched it grow, by year 29 it would be at $411.61 and by year 30 at $432.19. Between year’s 29 and 30 your account grew $20.58. That is the miracle of compounding! If you’re interested in calculating your own estimated retirement savings, here is a helpful compounding calculator.
Another scenario
Now that you know about compounding, let’s work through another example to really enforce saving now versus beginning to save later.
Let’s say you begin investing in your 20’s and you start with that same $100. This time however, you invest another $100 a month, and continue to do this for 40 years. If your account grows at 8% per year, in 30 years compounded annually, you would now have $313,040.27.
Now on the other hand, your friend hasn’t been saving as diligently as you have. He knows that he wants to retire at age 65, so at age 55 he opens an account with the same $100 that you did. But since he is starting later than you, he decides to put $1,000 into his account each month, instead of your $100, in order to save faster. After 10 years of investing $1,000 a month at a rate of 8% per year, your friend would now have $174,054.64.
So even though your friend was investing 10 times as much as you for those 10 last years, you will have $138,985.63 more thanks to compounding!
Conclusion
Even though your 20’s and 30’s are a time to enjoy yourself, they should also be the time that you begin thinking about your retirement and actively beginning to save. The longer you give yourself to save for retirement, the easier it will. And on the reverse side: the longer you wait to save for retirement, the more you will need to invest in order to have enough saved.
While investing calculators can help you get an idea of how much you should be saving, they do not take into consideration your individual retirement needs, so please take this information with a grain of salt. The only way to truly plan for your retirement is with a professional financial planner. Westco Financial Group cares about your retirement and wants to help you be as prepared as possible. Call 516-593-5070 or email clientsvc@westcofinancialgroup.com today to set up your complimentary appointment!