When you’re young, investing for retirement is often only an afterthought. There are careers to build, weddings to plan, first homes to buy, children to raise and other financial concerns. Add to that the investor reluctance after a three-year bear market after the great returns in the 90s and you can see why young workers sometimes don’t invest much for their retirement. In fact, participants between the ages of 20 and 29 actually significantly decreased their plan contributions rates in 2002. Too bad, because that would have been a great time to continue to make full contributions, look where the market is today.
Time and compounding work
When you’re young, a few extra dollars can pump up your retirement plan account. At age 25, a contribution of $50 per month can grow to $113,508 by age 67. Increase your monthly contribution to $100 and your retirement nest egg can grow to $227,016.*
If you’re not convinced of the need to start saving early, consider this: Let’s say you start contributing $100 monthly to your plan at age 25, and then you stop contributing at age 35 to take care of other financial goals. Then, you resume the same contribution from age 45 until retirement at age 67, when you could have accumulated $165,871. Compare this to waiting 10 years and starting to contribute to your plan when you’re age 35. At $100 a month you could have accumulated $115,768 by age 67.*
Both scenarios have you investing the same amount for 32 years and earning the same annual rate of return. Yet, by starting at age 35, you earn about $50,000 less than if you started at age 25 and took 10 years off. Why the difference? By starting at 35, you missed out on the combination of time and compounding for the first 10 years.
Ways to save
If your employer offers a retirement plan and you are not participating in the plan, think of your contributions as: Not an option. Think of retirement contributions as a necessity, like your electric bill. Ultimately, your retirement savings plan will likely comprise the majority of your retirement income. A ‘discounted’ contribution. You make contributions to your retirement savings plan before taxes are deducted from your paycheck. In the 25% tax bracket, every $100 you contribute only costs $75 out of your take-home pay.
Reasons to save
Saving for retirement is crucial. Healthcare costs continue to rise. Average life expectancy constantly increases. You could live 20 years or longer in retirement. Will you have saved enough? Prepare now by making a plan. Four out of 10 plan participants haven’t tried to figure how much they’ll need in retirement and another four in 10 tried, but couldn’t come up with an answer.** How much will you need? When will you need it? And how much should you save? Put together a personal saving and investing strategy and contribute regularly and as much as you can today for a more comfortable retirement tomorrow.
*All examples are for illustrative purposes only and assume a 6% annual rate of return, compounded monthly. Rate of return does not reflect the actual return of any specific investment and is not intended to imply or guarantee future results. Regular investing does not guarantee a profit or protect against a loss in a declining market. Because the value of your investment will fluctuate, you should consider your ability to continue your investing during periods of low price levels.
** National Retirement Planning Coalition survey in August 2002.
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.