When thinking of retirement, it seems a long way off for those who are in their 20s and 30s. However, it can really sneak up on a person. Putting off retirement planning can be a killer when it comes to achieving a comfortable living during the golden years. That’s why it’s important to get started early.
Longer To Save
Having more time available to save is one reason it’s important to start saving early in life. Waiting until 10 years before retirement to start saving is a good way to have little possibility of saving a healthy sum. Without taking interest into account, a person who saves $5,000 from age 25 to age 65 will have $200,000 stashed for retirement. Waiting until age 50 would result in only $75,000. However, when taking compound interest into account, the numbers will look even more disparate.
Interest is the money that invested money earns as a result of being invested. A regular savings account will likely return less than 1% if recent history is any indicator. Certificates of deposit, more commonly known as CDs, will pay a bit more. Stocks and real estate will usually have higher returns. The average return of the broader stock market in the US has been around 10% annually. This interest adds to the value of an investment account, and previous interest will start to earn its own interest. Over time, this compounding interest can add up.
Compound Interest Over Time
Starting early is important because of compounding interest. Investing $100 a month over 40 years with a 12% annual return would add up to $1.17 million. Those who wait 30 years and decide to save $1,000 per month at the same average annual return will wind up with only $230,000. The second example saves $120,000 out of pocket. The person who started earlier only saved $48,000 out of pocket, yet she wound up with nearly five times the nest egg.
Getting started early is key to achieving a comfortable retirement. Compounded interest really starts to add up over time. Investing small amounts for long periods will generally beat saving large amounts for a shorter amount of time. The earlier a person starts saving, the more likely he or she will be to achieve success.