The answer is simple. Just because we may not be retiring for another 50 years (give or take) doesn’t mean we shouldn’t be planning for retirement now. It can be easy to feel like we don’t need to save much when we’re young, because we have plenty of time to do it. However, starting to save at a young age helps you take full advantage of compound interest and save more. Fully understanding the benefits of compound interest can be a huge motivator to start saving at the beginning of your career.
How Compound Interest Works
Let’s say Sally starts an IRA at 25 years old and puts in $6,000 a year ($500 a month) for 10 years. After 10 years, at age 35, Sally stops making contributions to her account and allows interest to take over. She contributed a total of $60,000 to her retirement account, but at age 65 she will have a little over $658,000, assuming a 7 percent annual interest rate.
Now let’s say Sally has a friend named Rachel, but Rachel doesn’t start investing in an IRA until age 35. Rachel puts the same $6,000 a year into her account until she retires at age 65. Even though Rachel put $120,000 more into her account than Sally – and saved for 20 years longer – she will have just under $610,000 in her IRA at retirement, assuming the same 7 percent annual return. How is it that Sally saved so much less than Rachel, but ended up with so much more? That, my friend, is the beauty of compound interest.
Compound Interest Benefits You the Most if You Start Young
Many young people make the mistake of thinking it’s not a big deal to wait an extra year to start a retirement account because the returns aren’t very substantial the first year anyway. However, you actually lose your last year of returns when you wait, not your first. This may end up costing you thousands of dollars, depending on the balance of your account when you retire.
What advice would you give to someone in their 20s about retirement planning? Share it here.
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Money Smart Kids
, Retirement
, Strategies for Saving
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Retirement Tips
