We all know that saving when you are young pays off later in life, although knowing is a lot different than doing.
At 25 years old the $200 you could be putting into your company sponsored retirement account could often be used to go skydiving, try all the hot new bars and restaurants, go to movies every weekend, etc. To show you how far that $200 can go down the road we are going to explore the difference in starting to save at 25, 35, and 45.
The $48,000 Difference
Doing some simple math we can calculate that at age 65, Elizabeth would have put in $96,000, Donald $72,000, and Sarah $48,000. This is considered our principal, the original amount of the investment separate from any earnings or interest accrued. While the $48,000 difference between Elizabeth’s and Sarah’s principal value is nothing to scoff at, the true difference lies when we add in investment returns over time.
The $300,000 Difference
Let’s assume that each of our investors has earned a steady 6% annual rate of return on their investments. That means each year their principal value increases by 6% and that new value keeps increasing by 6% each year. This idea is called compound interest.
The chart below demonstrates the drastic difference in the ending value of each of our investor’s accounts.
Elizabeth reaches 65 with nearly $400,000, Donald reaches 65 with just less than $190,000, and Sarah reaches 65 with almost $90,000.
Those are some staggering differences! These numbers don’t even take into account changes in salary and an increased monthly contribution rate.
Set Yourself up for Success
First and foremost, START SAVING! Better late than never – look at Sarah who still has nearly $90,000 after 20 years. The earlier you can start saving, even just a little could have a big impact.
The first place to start saving is your company’s retirement plan. A lot of companies offer a matching program where they will put a percentage towards your retirement account. For instance, if you contribute $1,000 a year and your company offers a 50% match, come year-end you will have $1,500. That is an instant 50% rate of return. No mutual fund can guarantee that kind of return year after year.
If you don’t have a company sponsored retirement program, you can open an individual retirement account with Vanguard, which offers low cost index funds and ETFs, or with Charles Schwab, which offers low cost stock trades.
How Can We Help?
Have you already started saving? Our customized wealth management solution might be for you. Using our D.Y.N.A.M.I.C. process we build a portfolio designed to meet your goals and objectives all while considering your risk tolerance using industry leading mutual fund managers, ETFs, and indexes.
We also offer Advisor-Guided Retirement Plans designed for plan sponsors who want to provide their employees with a retirement plan that has better choices, better service, and at a lower cost that your typical bundled, out-of-the box 401(k) plan.
Contact us today at 410.685.9685!