I know when I was in my 20s the last thing I was thinking about was retirement, but if you are in your 20s, maybe you should give it some more thought.
In the following example:
- Susan, who invests $5,000 per year only from ages 25 to 35 (10 years).
- Bill, who also invests $5,000 per year, but from ages 35 to 65 (30 years).
- Chris, who also invests $5,000 per year, but from ages 25 to 65 (40 years).
Who do you think is best prepared for retirement?
You would think Chris because he put the most money in, at $80,000 would be the best off as compared to someone like Susan who put in $50,000 right?
Well no, because of the power of compounding interest.
The theory of compound interest is that you earn interest on your investment one year, then that interest earned in turn will earn additional interest in the following years.
Check out this chart from J.P. Morgan regarding retirement to illustrate the fact:
At retirement, Susan ends up with $1,142,811, while Bill ends up with only $540,741, Chris in the middle lands at $602,070.
If you do the math, Susan ends up with pretty much what Bill and Chris end up with combined, even though she only invested for 10 years.
Due to her early start and the snowballing effect of the compound interest she earns, she is the best off at retirement.
Regardless of age, maybe putting more into retirement savings at an earlier age should be part of your New Year’s Resolutions.