Saving for Retirement: Why Starting Early Matters

​ Summary

Starting early to save for retirement is crucial due to the power of compounding interest, which allows your money to grow exponentially over time. Even small monthly contributions can significantly impact your portfolio, especially when combined with tax-advantaged retirement accounts like IRAs. By beginning early, you gain flexibility in your savings plan, confidence in your financial future, and the freedom to shape your retirement on your terms.

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Saving for retirement while you’re young is an afterthought for many. After all, you have decades left to worry about that, right?

But starting early and sticking with your plan will help you benefit from the power of compounding, build a disciplined investing strategy, and grow a larger portfolio in the long run.

A Little Goes a Long Way

One common concern among younger investors is the perception that they don’t have enough disposable income to make investing worthwhile. You may think, “What difference can $50 or $100 a month really make?”

While it may seem like small monthly contributions don’t make a big difference, your portfolio will snowball nicely over time.

By investing just $100 each month starting at 25, you could retire with $1.1M+ by the time you are 65, assuming a 12% annual rate of return.

And this amount is an understatement, given that your earning potential and retirement contributions are likely to increase as you age. Starting small with just the amount of money you can invest can lay the foundation for a growing portfolio as you age.

Account Options for Investing at an Early Age

Being a young professional affords you the unique opportunity to utilize some of the best tax-advantaged retirement accounts available.

You can leverage your workplace retirement savings plan and, based on your income, contribute to a Traditional or Roth IRA.

IRAs have limitations based on your income and coverage by a workplace savings plan, which makes them well-suited for early-career professionals who can qualify without exceeding the income ceiling.

The Power of Compounding

The earlier you start investing, the more you can benefit from compounding interest. You want this but don’t take my word for it.

Albert Einstein once said, “Compound interest is the eighth wonder of the world…”

In short, compound interest calculates your investment return based on your previous principal and the interest you’ve earned along the way. The magic happens when you earn interest on interest.

Compound Interest Example

If you invest $1,000 and earn a 10% return each year for three years with annual compounding, your earnings would look like this:

Total after year one: $1,100

Total after year two: $1,210

Total after year three: $1,331

Total return after three years with compounding interest = $1,331

But, if you took these same inputs without compounding interest, your returns would look like this:

Total after year one: $1,100

Total after year two: $1,200

Total after year three: $1,300

Total return after three years with non-compounding interest = $1,300

With compounding interest, your total return was $31 extra because interest was calculated based on prior interest. This relationship creates an ever-accelerating rate of return as more interest is generated from your portfolio, underscoring the importance of investing when you’re young to benefit from the long-term impacts of compounding.

Benefits of Investing for Retirement at an Early Age

Investing for retirement at an early age ultimately provides you with more flexibility in your savings plan and the confidence that you’re well prepared for retirement.

By beginning early, you allow your portfolio to grow more significantly over time, thanks in large part to the compounding effect. A larger portfolio in retirement can also reduce your dependence on other income sources, such as Social Security.

As you grow closer to retirement, you’ll also feel more confident and in control of your finances. By preparing early, you’re less likely to feel anxious or unprepared as you near the magical age.

Additionally, starting early can help you feel more in control of your financial future. You’re less likely to experience anxiety about whether you’re prepared as retirement approaches, and you may even have the option to retire early if you reach your goals ahead of schedule.

Beyond financial security, an early start allows you to maintain your desired lifestyle during retirement, whether that means traveling, dining out, or simply enjoying life with loved ones. The financial stability you gain through early retirement investing can give you the freedom to shape your retirement on your terms.

It may seem trivial to begin investing while you’re young, but as your portfolio shapes up, you’ll see the many benefits you’ve created for yourself by being a proactive saver.

The Bottom Line

Regardless of how much you can invest, opening your first retirement account and beginning funding it with small monthly deposits is a meaningful step toward creating the future you want for yourself.

Over time, the long-term effects of compounding will positively impact your savings goal and help you reach your magic retirement number faster

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