What Age Should I Start Saving For Retirement?
Ask this question to 100 people and you will receive 100 very different answers. The fact of the matter is there is no right age to start. But dont fret (did I just say fret?) knowledge is power!
To borrow a line from Star Wars, Use the force Luke. The force Im speaking of is compound interest. Since our main objective is to find an ideal age to begin saving, you have to understand the difference between simple and compound interest. Simple interest can be figured by taking an initial investment that earns interest annually for a period of (lets say) two years. After the first year you have your original investment plus the interest. In the second year you have the initial investment plus the interest for the second year, the interest from the first year is not added. What youre lacking is that you dont earn interest on the interest you already earned. Its not compounded. Can you see where Im going with this? With compound interest you take that initial investment and earn interest in the first year, then in the second year you add the initial investment plus the interest from the first year and earn interest on the whole amount.
Now that you know the difference, lets see how two people use the force!
Person A starts saving at the age of 25. They start out with a zero balance and contribute $200 monthly until retirement (65). Assuming an average annual rate of return of 12%, Person A can retire with $2,061,941.74. Wow! Millionaire status achieved, two-fold.
Person B starts saving at the age of 40. Because person B is further in life, well assume this person started with an initial investment of $10,000 and contributes twice as much, $400 per month, with the same 12% average annual rate of return. Person B will retire at the same age (65) with $886,803.53. Hey, thats not fair! No, thats compound interest at its finest. J
So, what are you waiting for? Put your pizza and cheeseburger money to better use and start saving! Your love handles will thank you for it!
About The Author
Brian Weiss is owner operator of http://www.InvestmentRunner.com a specialty search engine with free investors software, spread sheets, investors dictionary, and financial weblog.
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