Has anyone ever asked you why you waited to invest for retirement? I'm sure the reasons are many, but did you know that waiting can cost you time and money? Many of us put off investing for retirement because we figure we'll get to it soon enough, but that belief system really hurts us in the long run.
In the financial world we are interested in the term known as Compounding. It applies to how interest with investments is earned. Compound interest is defined by Wikipedia as "the addition of interest to the principal sum of a loan or deposit", interest on interest! When we are reinvesting interest, instead of paying it out, the interest accumulates throughout the year and longer. It is earnings on the principal sum we have plus previous accumulated interest.
When you think about the interest you pay on debt you owe, you are paying that interest "out" instead of keeping it for yourself. Compounding can work as a negative or positive for you depending on who benefits from the interest accumulating. Let me show you how compounding works when you are investing for your future.
Let's look at the graph below: This is the concept of "The Benefit of Time!"
We have a young person, Amy. She is investing $2,000/year, or almost $167/month into a qualified retirement account. The money is either growing tax free or tax deferred. All the money in the account compounds with the previous amount already in the account.
Amy decides she'll invest this amount of money monthly for 10 years between the age of 25 to 35, then stop. The benefit of time says that because the money is growing for a longer period of time until she retires, she'll have more saved up then a person who starts later in life.
Let's compare Amy with John who starts to invest later in life. He'll invest the same amount, $2,000, but he'll start at age 35 and go until he retires at age 65.
For Amy's total, she invested $20,000 over the years, and for John's total, he invested $60,000.00. Look at the graph again. See how John's procrastination has hurt his outcome? This illustration is for example purposes only, but the concept is real. We are also assuming an annual rate of return of 10%. Based on market history, this scenario is doable.
Look how much more Amy has than John and she invested for less time by 20 years! John also invested more than 3 times as much as Amy, yet he ended up with about 40% less for retirement, he never caught up to her. It does hurt to wait as you move forward with your life.
The hypothetical investment results are for illustrative purposes only and should not be deemed a representation of past or future results. Actual investment results may be more or less than those shown. This does not represent any specific product (and/or service.)
Even if you start with $50/month in your early 20's and increase it as often as you can, you have a better chance of having more for retirement then waiting until you can invest a sizeable amount at one time.