If you’re like most people, you’re aware that saving for your retirement years is important. After all, most of us don’t plan to work forever. But also like most people, you may be wondering when is the right time to start saving – now, or later?
Younger people face significant monthly expenses, and they’re often just getting started with their careers and building their families. It can feel as though planning for retirement just isn’t that important right now, or it’s even impossible. They might feel tempted to put off retirement planning until later, when they’re more financially comfortable. But doing this can be a big mistake, and can cause you significant problems later.
Even if you save only a small amount each month, you can build a sizable retirement portfolio over time. The key is to treat monthly savings as another necessary expense, just as you’d view your house or car payment, and to give it priority in your budget.
Consider the following examples*, and compare the outcomes for these two theoretical young people:
Tom saves 275 dollars each month for ten years, and then stops. His friend Judy wants to wait on retirement planning, because she feels other things are important right now. At the same time Tom stops saving, Judy finally begins, and she also sets aside 275 dollars per month for ten years.
Let’s assume a theoretical 8 percent return on both Tom and Judy’s investments (this can vary, but our point here is the timing of their savings, so we want to keep everything else equal). Tom and Judy both set aside 33,000 dollars during the times they were each saving. However, Tom’s investment has twenty years to grow, while Judy’s money only grows for ten years because she started ten years late.
At the end of this theoretical twenty years, Tom has 112,415 dollars in the bank. Judy has 50,646 dollars.
It’s easy to see that Judy cost herself an enormous sum of money by waiting to save for retirement. By doing nothing for that first ten years, she lost ten years’ worth of compounding interest!
If you, like Judy, find it difficult to save for retirement now, try having a small amount automatically deducted from your paycheck each pay period. You won’t miss the money as much if you never hold it in your hand, and it can be automatically deposited into a retirement account. You can always increase the amount withheld later, as your salary increases, but don’t waste time! Take advantage of the power of compounding interest, and start saving for retirement now.
*This is a hypothetical example which illustrates the effect of mathematical compounding. It does not represent actual performance of any specific investment. Rates of return vary over time, and investments offering higher rates of return involve higher risk. These amounts do not include taxes, inflation, and fees. Actual results will vary.
This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice.