We find it so easy to delay things that aren’t front of mind. These tasks seem so far away, we can always convince ourselves we will “get to that later.” Procrastination or putting these items off until the last minute may have worked on your college papers or even getting that last minute table reservation before Valentine’s Day (hint, hint); but it certainly does not work when saving for retirement. In fact, every year you wait to start saving is costing you money.
There is a long told tale in finance called the “tale of two investors;” it has been told before and it will be told again. In fact, I first heard this story from my Father, who is also in the business of giving financial advice, and it resonated with me even as a high-school student at the time. A simple example of how my first summer-job’s paycheck could exponentially grow when invested correctly and systematically in the market, peaked my curiosity and thankfully started a personal habit of saving early on in my life. Now, rather than examining a savings plan of a measly high-school paycheck, we can apply the same principles to our careers beginning in our 20s and 30s. This is a crucial time where making a decision between a down payment on the new Tesla or an IRA contribution can create wealth for your future or a wealth of double-takes at an intersection. We all know that we should be saving, but why? Why do the generations before us always insist that we “save 10% of your paycheck” from the very beginning? Let’s look at the numbers. Say, for example, you start investing at age 35 and plan to retire at 65, providing you with 30 years of investing before retirement. This seems like a sufficient amount of time, right? Well, if you save $5,000 per year and we project an annualized return of 7%, you would have approximately $505,000 after 30 years. The investment gain on the principal you contributed is roughly $355,000. This is great, don’t get me wrong. But what did it cost you to delay your savings plan 10 years, rather than starting at the age of 25? If you had started investing the same $5,000 per year, 10 years earlier at the age of 25, and stopped contributing at the age of 35, you would have nearly $562,000 at the age of 65, of which about $512,000 is pure investment gain! In contrast, you would have contributed only $50,000 over 10 years compared to $150,000 over 30 years, and would achieve a larger nest egg. Once again, starting at 25, you could contribute one-third of the amount of principal and still end up with more money at the age of 65. That is the power of compounding interest and the motivation for starting early. Not to mention, if you continued making the annual contribution of $5,000 from age 25 to 65, you would have over $1,000,000 in your account, nearly 2 times the amount if you had waited. Now, I completely understand not every 25-year old can begin investing $5,000 per year, nor do I think this annual amount is even sufficient for a comfortable retirement. I also understand that many of you reading this are well above the age of 25 or even 35, and may think you already waited too long. However, I hope the example above encourages you to put time on your side and begin saving for your financial goals today. And for those of you who are currently retired, this is certainly a concept to pass down to your children and grandchildren. It is also an opportunity to educate them about the long-term benefits of a disciplined savings strategy – the same thing we do here at Avier Wealth Advisors with our clients’ family members. The point here is simple: Regardless of your age, the sooner you make saving and investing a priority, the less you will cost yourself as you pursue financial independence.