There are so many reasons to start saving for retirement now as opposed to waiting another 5, or even 10 years. While it may seem ridiculous to start thinking about something that seems so far away, it is one of the smartest things you can do. I wrote a post last week about losing out on free money from an employer match. That was just one of at least 100 reasons I can think of to start saving for retirement as soon as you possibly can.
Another big one I wanted to make you aware of is the amount of interest you will be losing out on by waiting to get started.
To a financial blogger, compound interest is like gold. We understand how much of a difference this can mean for your future and the size of your nest egg, but it’s hard to explain without getting too technical and boring people to bailing out on the article. So here goes..
What is compound interest?
It is interest added to the principal amount of your investments that allows more interest to be earned from what was already accrued. In simple terms: the money you invest grows, and that interest is reinvested so you keep earning more and more money over time.
Time is the key variable here. If you leave your money alone and just keep adding to it, over time it grows to an extraordinary amount. You have to start early though, delaying your contributions for just 10 years can have horrendous effects on the wealth you acquire, as you’ll see in the example below.
The Walking Dead and Retirement
Are you a fan of watching zombies destroy the earth? – A.K.A. The Walking Dead? Of course you are, so here is an example you might like.
Let’s say Michonne, Daryl and Rick each made a conscious effort to put money into their retirement accounts. However, they ended up doing so on a very different schedule.
Michonne, being the ultra-wise and all-knowing, started adding money to her 401k when she was 25 years old. She put in $4,800 a year (or $400 each month) each year until she retired at age 65.
Daryl started off strong and put away $4,800 a year from age 25 to age 35. However, he stopped contributing at age 35 because he decided he wanted to spend that $400 each month on beer and crossbows.
Rick was a stubborn little cop and didn’t start investing until age 35. “My 20’s are for partying and buying guns, I don’t have an extra $400 each month to put aside for retirement. That’s 40 years away!” Once he was 35 he decided to settle down and start investing. He invested $4,800 year year until he was 65. His 30 years of investing has to be better than Daryl’s measly 10 years, right?
Silly, Rick. Daryl ended up with $300k more than he did, even though he paid $100k less to get there.
How is that possible?!
Compounding interest and the power of time.
Here is how they made out:
These numbers do not take into account inflation and represent the same percentage of growth. The final numbers are not hard and fast as the market does fluctuate, but this was given as an example to show you the large difference time can make on your future wealth.
Because Daryl’s money had 30-40 years to grow, it ended up a sizable amount larger than Rick’s money which only had, at most, 30 years to grow.
Of course, Michonne’s plan was the winner here as she ended up with about 40% more money than Daryl, and 60% more than Rick. Consistently contributing to your retirement accounts as early as possible is how you end up a winner in retirement. But, even if you are only going to choose 10 years to invest in your future, choose this year and the next ten, do not delay.
Start contributing now and you don’t have to pay as much out of pocket towards retirement. Wait even just a few years and you are doing yourself a serious disservice.
Don’t Turn Into a Financial Zombie
I understand that it may be hard to start putting away $400 each month, but you want to stretch and see if you can increase contributions now. Many financial professionals will tell you that putting away 15% of your income is the perfect number. Don’t let that stop you from putting away more, and don’t let that hinder you from putting in less if that’s what you are able to contribute at this time. Putting away 7% is 100 times more beneficial for you than putting away nothing.
If you don’t plan for anything else in your entire life, make a plan to put away money for retirement and you can save yourself so much time, energy and won’t have to put in as much money towards your retirement.
Want to see approximately how much you’ll have saved for retirement? Check out this retirement calculator to see if you’re on track.