Investing, like most things, is better started early.
Einstein declared compounding interest to be the “eighth wonder of the world.” He went on further and said, “He who understands it, earns it… he who doesn’t… pays it.” This is especially true when it comes to saving for retirement.
You compound interest through investing, and you compound your payment by borrowing.
The Economic Policy Institute put out a report earlier which, to be honest, sucked.
“the typical working-age family or individual has no savings at all in retirement accounts”
However, this isn’t the story about the failure of retirement investment vehicles or the paltry savings of the American worker. It’s about the early bird getting the worm.
When you’re younger and just starting out in life your paycheck is probably the lowest it’s ever going to be (Well, at least if you’re reading this site). In tandem, your expenses are also the lowest they’re ever going to be.
As you get older, responsibilities and bills add up. By starting to invest early you can get ahead of some of your expected expenses, and better prepare yourself for financial security.
Marriage, childbearing and home purchases are all being delayed — partly because of increased debt and financial strain. Distinguishing what you need to have from what you want to have helps you increase your savings and better prepare for those golden years.
None of this is new information. The problem with saving is that it isn’t sexy, especially compared to those Facebook posts of your friends purchasing the latest gadgets and branded gear. Yet, while savings doesn’t generate a sexy Facebook update right away, you’ll appreciate it when most of your peers start worrying about saving for retirement. Humor me a little bit.
Let’s say you started stashing $10,000 a year (in a low-cost S&P 500 index fund, like the ones offered by Vanguard) when you turned 25. After compounding for 6% a year, you would have $139,716 by your 35th birthday.
Hmm, that doesn’t sound like very much, but you’re now 35 and have a mortgage and college savings account to contribute to, you just don’t have the extra cash to save for something silly like retirement. You slash your savings to zero dollars a year!
30 years pass in a snap and now you’re being handed a golden watch at work which is the nicest way of saying GTFO.
But what about my retirement balance?! You log-in to your Vanguard account, sweat drenching your sweater-vest (because you’re into sweater-vests now) and see $802,460! Way to go 25 year-old you.
While all those years you were working, that money you had put away earlier was working for you.
Meanwhile, Bob from accounting, who only started saving on your joint 45th birthday (funny how that works) only has $701,869 saved, and this despite the fact that he maxed out his 401K at $18,000 a year!
Admittedly, with a prudent 4% withdrawal rate your $802,460 only yields $32,000 a year in perpetuity. However, this 32K doesn’t include social security, which despite media concerns, will not be bankrupt. And finally, you’re still beating out the majority of Americans on savings! Even the households in the 90th percentile of savings only had $274,000 saved!
All in all, you should never stop putting money away, as one can never predict the future. With autonomous cars on the horizon who is to say that we all will not be laid off in the next 40 years, however if you start investing early, you don’t need your work to keep making money.