When you talk to retirees, many will tell you if that if they had it to do all over again, they would do some things differently when it came to saving for retirement.
A recent study by Bankrate.com study showed that 3 out of 4 baby boomers and retirees stated that one of their biggest regrets was that they didn’t begin saving at a younger age.
A big challenge many parents face today is getting their adult children interested in saving money. Let’s face it, when you’re in your early 20s the last thing you’re thinking about is saving for retirement. If you tell them they should start putting something away for retirement, their response will probably sound something like: “Why do I need to start saving now? I’m only 20 years old. I won’t be retiring for another 40 or 50 years. I have plenty of time.”
The fact that they have “plenty of time” until they retire, is the single biggest reason they should start saving something for retirement.
The sooner you begin saving, the more time your money has to compound. The longer you leave your returns to compound, the more dramatic the exponential growth will be. The effect is much like that of a snowball rolling down a hill: The bigger the snowball gets, the more snow it packs on with each revolution. The exponential growth of savings due to compounding is so powerful that an investor who saves for 10 years can actually outearn someone who saves for 30 years.
Consider the following hypothetical example.
Jack and Jill are 21 and both work part time while attending college. Jill starts saving $4,000 until age 30. After age 30, she never saves another penny. Jack chooses to wait to start saving until age 31. He then starts saving $4,000 each year until age 62. Jack and Jill’s investments both earned the same average return of 9%. When they turn 62, John has $715,200 in savings; however, Jill has just over $1 million in savings. (A chart showing the annual returns can be found under “Investment Articles” at capitalwealthmngt.com)
How is that possible that Jill ended up with $285,000 more money than Jack? John saved three times longer and contributed $104,000 more than Jill. The difference is that Jill started saving 10 years earlier than Jack, and that additional 10 years of compounding is what turned Jill’s $40,000 of contributions into more than $1 million of savings.
Of all the investment strategies designed to provide a comfortable retirement, nothing is as effective as the most basic investment savings strategy: “as soon as you can.” Time and compounding will take care of the rest.
