Younger workers often ask the question, “should I be saving for retirement now, I am only 25 years old?”. The short answer to this question is absolutely! Do not wait another day to begin saving. Now why would I believe that is the correct answer? In this blog post I hope to show the benefits of starting to save early in one’s working career.
Why should a worker that believes he or she has at least 40 years until retirement even consider saving for an event that is further in the future than they have lived on this earth? Well, the answer is time is a wonderful friend when we are speaking about investing. Consider this, if a 35 year old were to start saving for his or her retirement by setting aside $100 per month until they reach age 65, and assuming an 8% annual return on those monies, they would have a little over $140,000 at age 65. Not bad. After all the individual in this hypothetical example would have saved $100 per month for 36 months, for a total investment cost basis of $36,000, and they would have seen a little over $100,000 in gains coming from the 8% annual return.
What would happen if that same individual began saving just 10 years earlier at age 25 instead of 35? Could 10 extra years really have that much of an impact? Believe it or not, if an individual began saving the same $100 per month at age 25, and they continued to save the $100 per month until age 65, the total amount of their savings would be approximately $325,000 – a difference of over $180,000 in total savings! How can this be?
You mean starting just 10 years sooner (which remember, allowed for an additional $12,000 of contributions as well) allowed a person to more than double the amount they would have saved if they waited to those 10 extra years to start? Absolutely! The reason is the money was in the account for a longer period of time, which means it had more time to grow. This is the reason financial planners are so adamant about younger people starting to save for an event that seems like an eternity away. You simply cannot make up for the growth potential that having additional time to save provides.
A little over a year ago, I met with a young lady who had just completed her nurse practitioner schooling and passed her NP board exam. She was in her mid 20’s and made a little under $100,000 per year. I showed her that by saving just 6% of her income (and assuming that income would grow by 2% per year for cost of living adjustment raises), having the money in her account grow by a 7% annual return, and saving until age 65, she would have the opportunity to amass over $2 million in retirement savings. In case you are wondering, I did disclose to her how $2 million in 40 years would not have nearly the same buying power as $2 million currently would due to inflation, but the centerpiece of the story remained the same, if you start saving early, you can build great sums of wealth.