Whether you’re just entering the job scene or you’re on the verge of retirement, it’s never too early or too late to save. Time is the most valuable asset when it comes to savings, so taking advantage of it early on will pay off…literally.
The table below illustrates the impact of saving early. The first scenario shows a saver who invests $200 every month for 40 years. Assuming a 6% annual rate of return, this saver would have accumulated $400,289 by the age of 65.
The second scenario shows a saver who does not start saving at age 25, but decides to wait five years. At a $200 per month savings rate and a 6% annual rate of return, the account value by the time this saver reaches age 65 is $286,367 — a significant amount less. This is because they missed out on 5 years of earning and compounding. For saver two to achieve the same results as saver one at age 65, he/she would have to save $280/month as compared to $200/month.
Additionally, when you’re young you can afford to take risks financially. Consider distributing your money into multiple funds and accounts – some safe, some risky. That way if the risky investment tanks, you haven’t put all your eggs in one basket. Doing this when you’re young gives you time to make that money back. On the other hand, if your risk pays off you can have an opportunity for potentially higher returns over time.
Want to learn about tax treatment options and catching up with contributions? Check out the Phases of Planning for Retirement – Mid Career.