Often financial advisors hear, “When should I start saving for retirement?” from their clients. It may seem like a fairly reasonable inquiry, but the answer is always the same. NOW! Many advisors recommend that people should start saving for retirement in their early 20’s. Sooner, if they have the means to do so. For most people reading this, your early 20’s were some time ago. However, that does not mean you should just give up on the idea. The sooner you start, the better.
The Importance of Compounding Returns
Compounding is the term given when returns on investments are reinvested back into the investments. This causes dramatically greater growth over time, and is why it is so vital to start your retirement saving now.
Let’s look at an example to illustrate this point.
Take two friends, Frank and David. Frank and David are both 20 years old. Both find an investment opportunity promising a 15% interest return per year. Frank, wanting to enjoy life now, decides to wait for 10 years before investing. David, wisely decides to put away just $1000 per year until he turns 30.
When he turns 30, Frank decides he is going to start putting $3000 a year into the investment for the next 20 years. Unfortunately, David has found himself in a financial bind and is unable to continue saving towards his retirement. He is able to leave the money he invested there though and not touch it.
At age 50, we find that Frank’s investment of $60,000 ($3000 a year for 20 years) is now worth $310,000. With David, on the other hand, we find that his $10,000 investment ($1000 a year for 10 years) has now grown to $340,000. Even though David was not able to contribute the last 20 years and invested substantially less money, he still came out ahead.
And that is why starting today, even with a smaller amount, will pay huge dividends for you in the future. The earlier you start, the better your chances are of having the retirement you always dreamed of.