Saturday, August 2, 2008

The importance of investing early - a $555,000 difference

When you start saving for retirement will have a tremendous impact on whether you will successfully save enough money.  Let's look at four different hypothetical investors to illustrate this point.  Each one of them started working age 25 and plans to retire at age 65.  Should they choose to take advantage of it, this gives them forty years to save for retirement.  Now, lets see what happens to our hypothetical investors.

1. Investor number one is a regular reader of this blog and understands the importance of investing early.  She invests $100/month, every month, for the full forty years of her working life.

2.  Number two gets a bit of a late start and does not begin investing until he is 35 years old.  However, starting at age 35, he invests$133/month, every month, for thirty years.

3.  Although investor number three knew she should be investing, she didn't get around to it until she was half way through her career.  Starting at age 45, she invests $200/month for twenty years.

4.  Sadly, investor number four never thought much about retirement until he was already 55.  When he hits 55, he panics, and starts to save as much as he can.  For the next 10 years he puts away a full $400/month.

If you do the math, you will realize that each investor put the same amount of money into his or her account - $48,000 over the course of 40, 30, 20, or 10 years.  However, there are some very big differences in the total amount of money each has accumulated for retirement.  If you assume an 10% annual return each investor would have accumulated:

Investor number 4: $82,600

Investor number 3: $153,100

Investor number 2: $303,800

Investor number 1: $637,700

What does this mean for you?  Start investing as much as you can as soon as you can.  You will be very, very glad that you did.  Remember, each of these investors put in the same amount of money and achieved the same return on their investments, the only difference was when they started.

All of these numbers were calculated with the very cool Kiplinger Personal Finance 401(k) calculator.  

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