by Brian Korb, PH.D., CFA, CFP
You may have heard that starting to save earlier in your life will increase the likelihood of achieving your long-term goals, like retirement. That is certainly true. However, many people don’t realize how big of an impact it can have on the growth of your investments, especially if you reinvest your investment returns instead of spending them or leaving them in cash. Let’s look at two examples.
Consider Joe who started saving $2,000 per year when he got his first full-time job at age 22. If he earns an average of 7% on his investments during his lifetime, he will have accumulated $400,000 by age 62. During this 40-year period he would have only invested $80,000! What makes up the $320,000 difference? Compounding or reinvesting his returns! He kept invested and reaped a great reward.
Now let’s look at Janie’s situation. She had lots of things to buy when she started her first job and decided that she could not afford to save any money until she turned 32, ten years after Joe started saving. In order to catch up to Joe, she decided to save double the amount of Joe or $4,000 per year. By age 62, or 30 years later, she will have $378,000 in her retirement fund, $22,000 less than Joe. That’s not bad, right? Well, keep in mind that she invested $120,000, whereas Joe only invested $80,000, 33% less than Janie. What made the big difference? Time and the power of compounding!
HOW DO YOU TAKE ADVANTAGE of this TIME-TESTED PRINCIPLE and TURBO Charge your savings?
HERE ARE SOME IDEAS FOR YOU BASED ON YOUR STAGE IN LIFE:
Early Career 20s & 30s
If you are at the beginning of your working life, you likely have a lot of expenses, like student loans, starting a family, buying a home, etc. These are all valid and important. However, don’t forget your future! Trust me, retirement age comes quicker than you think. In order to save for retirement consider:
- Contributing pre-tax to your company’s retirement plan. You might even get a match from your company and you will never miss the money.
- Invest a portion of any bonus or raise in an IRA. You have until tax filing time on April 15 to make a 2014 contribution.
Mid Career 40s
You are nearing your peak earnings if not already there. Now is the time to maximize your savings, if you haven’t already done so. Consider the following:
- Fund your retirement savings prior to spending on your children’s education.
- If you are maxing out your annual pre-tax retirement contribution, open a mutual fund account and fund it with automatic investments from your checking account.
Late Career 50s & 60s
The light at the end of the tunnel is growing brighter, and that light is your retirement date. You don’t have long, but you can still do the following:
- In 2015, make sure you are saving the extra $6,000 catch-up provision to your company’s retirement plan (total $24,000) and the extra $1,000 to your IRA (total $6,500).
- Keep invested. It is tempting to become more conservative as your retirement date nears, but that will cut the power of compounding. Keep in mind that the average 65-year-old is expected to live another 20 years, and one of every four will live past age 90.
Start where you are. You can’t relive the past, but you can consider saving more now to take advantage of the power of compounding and turbocharge your saving into the future.
INVESTMENT PRODUCTS: NOT FDIC INSURED • NOT A DEPOSIT • NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY • NOT BANK GUARANTEED • MAY LOSE VALUE