Make time an asset, not a liability.
"Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn't, pays it". Albert Einstein
It can’t be overstated: giving yourself more time rather than less to achieve financial goals is critically important.
When it comes to saving enough for retirement, this is largely due to the power of compound interest, or compounding of earnings. Here’s a simple but powerful example of how important it is to start saving early for retirement.
Early Saver started contributing $5,000 a year at age 21 to a pretax retirement account and continued to contribute $5000 a year for 9 more years until she turned 30 years old. Early made no further contributions to her retirement account and kept her funds invested through age 65.
Later Saver waited to start saving for retirement until he was 36 years old. He made a $5000 contribution that year and continued to contribute $5000 a year for 29 more years through age 65.
Who had more in their retirement account at age 65, assuming they each invested in indexed ETFs that averaged a 7% annual return over the entire time period?
Later Saver made 30 annual contributions of $5000, or a total of $150,000 in contributions. Through the power of compound interest, Later ended up with a retirement account balance of $505,365 at age 65. Nice job!
Early Saver made 10 annual contributions of $5000, or a total of $50,000 in contributions. Through the power of compound interest, Early ended up with a retirement balance of $789,192 at age 65.
Wow, how could that happen?! Because Early’s money was invested 15 years longer, and that extra time resulted in a lot more compound earnings than the extra $100,000 in contributions that Later made.
The lesson is to start saving early, for retirement and other financial goals, to make time an asset.
Early’s strategy was good, but not optimal. Let’s strive to be like Best Saver, who contributed $10000 to their pretax retirement account at age 21 and continued to contribute $10000 a year for the next 34 years until they turned 65. Best ended up with a retirement account balance of $3,057,518 at age 65, which was the best of the bunch.
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