Absolute truths are a rare commodity in personal finance. Everybody’s situation is different due to factors such as income, expenses, location, age, risk tolerance, goals, and other energy forces that affect how we manage our money. However, one thing is certain: There are at least three real benefits to saving early for retirement.
1. Reaching retirement sooner
Spending less money than you earn and investing the difference is the cornerstone for building retirement plans. If you can accomplish this early in life, you’ll significantly increase the odds of reaching financial independence at a younger age. A recent survey from MoneyRates.com finds that people who start saving for retirement in their 20s are 66% more likely to say they’ll reach retirement by age 60 than people who waited until their 30s to begin saving. This is not too surprising given the effect of compounding returns, which we’ll take a look at later in this article. However, only 27% of respondents started saving for retirement in their 20s.
Women stand to benefit more than men from improved saving habits. Twenty-five percent of women start saving in their 20s, compared to 30% of men. This also leads to greater retirement uncertainty. In fact, 78% of the men in the survey expect to retire by age 70, but only 57% of women say the same.
2. Avoid procrastination
Old habits die hard. If you don’t start saving for retirement today, then when will you? Tomorrow sounds like a reasonable plan, but then life decides to surprise you, typically more than once. Only 52% of those surveyed by MoneyRates.com started saving for retirement by age 40, and saving rates generally don’t improve until people near the end of their careers.
“Retirement saving may be more challenging today than it’s ever been. People are living longer than ever and thus must support themselves for an increasing number of years, yet a changing economy can quickly make the skills of older workers outmoded,” explains Richard Barrington, CFA, primary spokesperson for MoneyRates.com. “Meanwhile, interest on savings accounts and other traditional income vehicles has all but disappeared. The absence of income production puts all the more pressure on savings to carry the load in retirement.”
3. More time, more money
Saving for retirement as soon as possible is a simple concept, but not always easy given job market conditions and personal situations. Nonetheless, the effects of compounding returns over several decades is astounding. As the chart above from JP Morgan shows, a person who invests $5,000 annually between the ages of 25 and 35 will have $602,070 at age 65, assuming a 7% annual return. In comparison, a person investing $5,000 between the ages of 35 and 65 will have only $540,741.
Market returns are not guaranteed and certainly come with more volatility than 7% each year, but the math shows the benefits of compounding returns over a greater period of time. The earlier you start, the better your chances will be of reaching your financial goals. The results are even more evident if you start early and keep a consistent pace. A person who invests $5,000 annually between the ages of 25 and 65 could accumulate more than $1 million for retirement.
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