Retirement is something that many people do not consider preparing for until their 30s, 40s, 50s or even later. If you are in your 20s you’re probably still trying to navigate your income, expenses, debt and how to make the most of your money, but one thing that should also be on your mind is retirement. The thought of investing money for retirement at such a young age may seem ridiculous when it is 40+ years away, but one of the greatest advantages people in their 20s have is time. Let’s take a look into how and why investing sooner rather than later can have tremendous benefits in the long run.
The power of compounding interest is positively correlated with time, which is why beginning to invest at a young age is incredibly beneficial in the years to come. Time is the most powerful tool for retirement and investment accounts because it allows young people in their 20s and early 30s to make smaller annual contributions while still accumulating a large some of money over time. The return on investment you receive is able to grow at a fast pace when you continuously reinvest your earnings.
At first the idea of incorporating retirement savings into your budget may seem like a challenging task, but in reality a small annual contribution can go a long way. Let’s take a look at an example that shows how these small contributions can have a huge impact on your future investment earnings.
In this example we will focus on the top image. Let’s say you are investing your money into a 401(k) account. If you begin to contribute $1,000 annually at the age of 25 for just ten years your 401(k) would accumulate to $157,435 by the age of 65, assuming an 8% rate of return. Breaking these numbers down into monthly contributions means that for 10 years you would only need to contribute approximately $84 a month to your 401(k) in order to see this result by age 65.
Now let’s take a look at the bottom image. Although it appears to be a similar situation to the top image, there is actually a vast difference between the outcomes. Making annual contributions of $1,000 to your 401(k) at the age of 35 for thirty years will result in an account balance of $122,346. Even though you assume the same 8% rate of return and your total investment is 3 times the amount of the first example you will still face a shortfall greater than $30,000 at age 65. Choosing to wait ten years until age 35 to invest results in a dramatic difference.
Time is on your side when you begin investing at a young age so take advantage of it. As Albert Einstein famously said, “Compound interest is the eighth wonder of the world. He who understands it, earns it…he who doesn’t…pays it.” Make the decision to invest now, even if it’s just a small monthly contribution. Contributing early and frequently will allow you to see the significant impact compounding interest has on your investment portfolio’s overall performance.