Let's say you start late:
At 30 years old and put away $1,500 per year.
You are going to retire at 65, or in 35 years.
Lastly, let's assume an annual interest rate of 6.5%.
When you retire at 65 you will have: $186,052
Now let's say you start earlier:
You are 22 years old, fresh out of college.
You are going to retire at 65, or in 43 years.
Lastly, let's assume an annual interest rate of 6.5%.
When you retire at 65 you will have: $323,030
At 30 years old and put away $1,500 per year.
You are going to retire at 65, or in 35 years.
Lastly, let's assume an annual interest rate of 6.5%.
When you retire at 65 you will have: $186,052
Now let's say you start earlier:
You are 22 years old, fresh out of college.
You are going to retire at 65, or in 43 years.
Lastly, let's assume an annual interest rate of 6.5%.
When you retire at 65 you will have: $323,030
By saving that same bit of money but starting just 8 years earlier, you will have close to an extra $140,000! In reality, you will probably start to put away even more as you get older and make more, and you may have a matching 401k plan to be able to save more money while you're younger also!
So why does this work?
That $1,500 you put away in year 1 makes 6.5% interest annually.
So in one year it will become $1,597.
Now in the second year, that $1,597 makes 6.5% interest and becomes $1,701.
One more year and your initial $1,500 is now $1,811. This is just from that one installment of $1,500.
Every year, the compounding interest makes a huge impact.
It's the same as the old penny trick you learned in elementary school - if I give you a penny today but I double the amount I give you for the next 30 days, then day two I will give you 2 pennies, day three I will give you 4 pennies, day four 8 pennies, so on. In 30 days I would have to give you over $5 million dollars. This is an example of compounding interest but the interest rate is 100%.
The obvious answer is "as soon as possible." Your parents probably told you that when you were younger, and your bosses may have even told you that if they set you up with a 401k account. So everyone has been saying to start saving while you're young, but did they go over the numbers with you at all? Compounding Interest is the key here, and if we look at a very easy example we see just how much of an impact is made by saving while you're young.
So the bottom line is - the earlier you start saving, the more money you will have [to play with] when you retire. It could easily be a couple hundred thousand dollars more!
So the bottom line is - the earlier you start saving, the more money you will have [to play with] when you retire. It could easily be a couple hundred thousand dollars more!
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