“I’m not saving for retirement now. I have other things to worry about,” said so many 25 year olds.
“I’m terrified that I’m not going to have enough money to retire,” said so many 50 year olds.
“I started saving too early for retirement,” said no one ever.
These are the types of things I hear — people not saving for retirement and worried that they started saving too late. No one ever says they started saving for retirement too early.
For young people, time is your best asset.
Time is on your side
For young people, what I hear the most is crickets – I don’t hear anything about saving for retirement. There is one reason why this is a fatal mistake: time. Time is on your side when you are young. The older you are, the less time you have to save for retirement.
“Older Millennials — those born in the early 1980s — will need about $1.8 million salted away to maintain their standard of living in retirement while younger Millennials — those born in the late 1990s — will need upwards of $2.5 million, according to various studies, estimates and experts.” — Says Robert Powell in this USA Today article.
This is a lot of money.
Based on historical performance, in order to grow your money through investments to have enough saved for retirement, you need to invest over time – a lot of time. The more time you have to save the better off you are because of compound interest.
I want to talk about compound interest. I know this sounds boring, but stay with me. It’s really important.
Compound interest is interest added to principal during one period, followed by interest added to the previous interest accumulated, and so on.
Compound interest is what you get when you invest. Compound interest is also what you pay when you carry a credit card balance.
For example, if $1000 earns 10% simple interest for 10 years, the end result is $2,000 (which means $1,000 in interest was earned). If the same amount of money earns compound interest for 10 years, the end result is $2,594 (which means that $1,594 in interest was earned). This is just from one deposit that grows over time. If you make consistent deposits monthly or annually, the effect is even more dramatic.
Because of compound interest, over time, steady, modest savings can grow into a sizable retirement nest egg that would not grow if you just saved it under your mattress or in a savings account without compounding interest.
An example with real numbers
If you start saving $200 / month for retirement when you’re 25 years old and save until you’re 60, and assume an overall average rate of return of 7.5%, your money will grow to $406,152.
If you start savings $200 / month for retirement when you’re 35 years old and save until you’re 60 with an assumed rate of return of 7.5%, your money will grow to $175,452.
If you double your $200 to contribute $400 / month when you’re 35 with all other information staying the same, your money will grow to $350,904.
Notice how doubling your money ten years later will still not get you to achieve the growth that you’d have starting with half as much savings 10 years earlier. This is the value of time – it’s critically important to start saving early.
Saving steadily over time is more powerful than saving more money later in life. You have the benefit of compound interest over time and your money has the potential to grow into a solid nest egg for retirement.
What to do next
The most important thing to remember is that starting to save for retirement does matter right now.
So, start by investing in your employer’s retirement plan, or an IRA/Roth IRA.
Next, you need to keep learning about this stuff. It’s so important. Your financial future depends on it. I read Retire Inspired by Chris Hogan, and I highly recommend it. It will dive deeper into saving for retirement in a way that’s straightforward and easy to understand.
Remember – no one will care more about your money than you will. Even if you’re not enthused by the thought of learning about, or saving for, retirement, it’s part of being a responsible adult. You owe it to your future self who wants to retire someday.
Saving for retirement does not have to be overwhelming and there really is no better time to start than right now (you’re not getting any younger!).