Young people generally wonder why they need to start saving for their retirement right away? The answer is straightforward- The earlier you start the better. It is a noted fact that the people in their early twenties who have just stepped out of college and landed a job concentrate on their career development and not ending it in far-flung future. It is their mind-set that fails to comprehend the apparent logic behind starting early.
The sooner you start on the more time your retirement savings have to grow. There are two forces at work here, deferred consumption and compounding. When you defer your expenses and save instead, you build up a capital. This capital when invested earns more money over a longer period of time and your savings grow. The gains on this investment will generate more gains next year due to the compounding effect.
If you postpone saving for your retirement until you are in thirties, the total amount by the time you retire will be far less than what it could have been if you had saved while in twenties. Consider an example- If you are 23 years of age and start saving for retirement. You put away $2500 every year in a tax-deferred retirement account for the next 42 years at the rate of return is 8%. By the time you retire at 65, you will have a nest-egg of $ 760,608.81. Consider another scenario where you put off saving until you are 33 years of age. You put away $5000 every year in a tax-deferred retirement account, for the next 32 years at the rate of return of 8%. At the time of retirement you will have a nest-egg of only $ 671,067.69. So even if you double up the contribution you still end up with less amount of money.
It’s not about saving more, it’s about saving early. In your twenties you have fewer responsibilities and can contribute a greater amount towards retirement fund. It may also occur that someone in their twenties finds it difficult putting away money in the retirement fund, due to repayment of student’s loan. However, it is not absolutely impossible. Do not let the expenses become an excuse to deter you from saving. A balance must be established. If you are eligible for investing in 401(k), go ahead and make the most of the few dollars. 401(k) is one of the best investment options because the employer also contributes a share to your 401(k).
When in thirties, the responsibilities you shoulder augment day by day. It’s your family, kids and their education you have to take care of, calling for more money. In that case you can decrease the amount you put away for retirement fund, and not get hard-pressed for cash. Also the market instability in short-term won’t hamper your long-term investments.
So basically it’s all about time and compounding effect that will work out to build wealth for your later life, provided you understand how the mechanism works and you make efforts to set it in motion.