It’s often said that youth is wasted on the young. That’s often true when it comes to retirement planning. It’s incredibly hard to get most 20-somethings to focus on their retirement — an event they perceive will happen far in the distant future, like just before the sun burns out.
That’s unfortunate for two reasons. First, while young people may not have a lot of money to save for retirement, they have something almost as important — time for that money to grow. Second, if young people understood how to tap the financial power of time to fund their post-career years, they might be more inclined to follow their professional passion or serve the community rather than feeling obligated to take a job just for the money.
How powerful is the gift of time enjoyed by young people? Properly harnessed with the miracle of compounding, it can help a person in their mid-20s grow a $1 million nest egg on even a modest income. All it takes is commitment and discipline.
Compounding is the accelerated growth in value that occurs when the earnings generated by an investment are reinvested and produce even more earnings. Time is critical to this process. The longer an investment can simmer or “compound,” the fatter it will grow as it feeds on earnings on earnings on earnings. Starting to save for retirement in your 20s will make a huge difference in the size of your nest egg — and how much you need to contribute to get to that $1 million mark.
If you get started at age 25, you need to save just $5,346 per year to reach $1 million by age 65, assuming a 6.5 percent average annual growth rate. But if you don’t get going until age 35, you must sock away $10,871 per year to meet that goal. Put things off until you’re 45 and that number soars to $24,184. Wait till your 55 and you’ll need to save $69,500 every year to get to a cool million.
Here’s another way to look at it: If you start saving $10,000 per year at 25, you will have $1.8 million when you turn 65, assuming that 6.5 percent annual return. Start saving the same amount at 35 and you end up with about half as much — $919,000. Those 10 years make a huge difference!
This math explains how people, including many of my clients, can retire with $1 million after careers in public service or other professions that paid moderate salaries. They started very early and prioritized savings over spending.
I typically recommend devoting a minimum 20 percent of your gross income to savings. So, even if you make just $25,000, you should be setting aside $5,000 per year. This might be tough for a 25-year-old facing student debt and the startup costs of adult life, but it can be done. All it takes is commitment, discipline, and maybe a second job. And remember, the pain is temporary. As your income grows, that $5,346 per year will be less and less noticeable in your budget.
So, regardless of your age, if you aren’t saving for retirement, start today. And if you’re already happily retired, share this bit of wisdom with your kids or grandkids. It’s a wonderful gift — if they’ll accept it!
Disclosure: This information is provided to you as a resource for informational purposes only. It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. For purposes of this article, an average 6.5 percent annual growth rate was assumed, which is an industry standard conservative average growth rate. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal. This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.