By Allison Kade
For some people, the words “retirement” and “pension” conjure images of shuffleboard and early-bird specials – but if you want to enjoy a retirement full of good health, family and, yes, patio sports, you have to start thinking about it while you’re young.
When everyday expenses are eating into your paycheck, it can be hard to muster the motivation to set aside money for your theoretical future self, but time is actually your greatest ally.
It’s tempting to say, “I’ll save more later, when I have a bigger salary,” but the longer you wait, the harder it gets to make up the difference.
For example, let’s say you start contributing $5,000 every year into a retirement account while you’re 25, and you do so until you’re 35. Over 10 years, you invest a total of $50,000. After 10 years, you stop contributing. For the next 30 years, you don’t touch the account until you retire at 65. Provided that your portfolio grows at about 7% per year, you could end up with around $560,000.
By contrast, let’s say you started investing 10 years later, at age 35. You still contribute $5,000 a year, but in this example you don’t stop until you hit 65. Over 30 years, you invest a total of $150,000. You might expect to come out significantly better-off than your 25-year-old self. After all, you’ve contributed three times as much. But actually, your nest egg at 65 would probably be significantly lower, despite saving so much more!
At that same 7% growth rate, you’d end up with around $505,000. So, despite shelling out an extra $100,000, you’d still end up with about $55,000 less.
Time is your trump card: play it as early as possible and you’ll maximize the powerful benefits of compound interest (by reinvesting your dividends, your money will start growing on itself) and the value of a long time horizon (the longer you have before you need your money back, the more years it’ll just keep growing).
Since retirement accounts typically rely on the success of investments – rather than guaranteeing a set level of interest – you might be nervous about putting your money in the stock market. Yes, markets will crash. No, you can’t guarantee what kind of returns your portfolio will garner. But over a long time period, you can brave short-lived market dips. And when we’re talking about decades, even a few years can start to meet the definition for “short-lived.”
Consider this: If you invested a total of $1,000 for 30 years, from 1983 to 2013, that money would have turned into close to $27,000. That’s even after the financial crashes of 1987, 2001 and 2008!
Maxing out your IRA or 401(k) limits can feel difficult sometimes, but having a solid budget and savings plan can help. Try tracking your expenses and budget apps or tools like GoodBudget, Mint or LearnVest.
And just remember: The earlier you get started, the more likely the biggest worry in your golden years will be your shuffleboard technique, not the size of your wallet.