What is your idea of retirement? Do you plan to do anything special or go anywhere special? Is retirement an age in which you can stop working? Will you rely on social security? How much will you need to save to retire? These are all questions that people generally have about retirement, questions that when left unanswered cause us to do nothing. Saving for retirement and specifically investing is something that many people do not understand and do not really know where to turn to in order to get enough information to make a choice, so instead of doing something they do nothing.
The Cost of Doing Nothing
Doing nothing can be very costly, especially when it comes to investing money. The following pictures are the illustrations of how compounding interest works using 10% as the rate of return. It is worth noting that investing into mutual funds, stocks, bonds, etc. does not produce a level rate of return and cannot be accurately measured because their rate of return goes up and down with the market. Since the market rises and falls it is generally best to invest over a longer period of time, which will be talked about in more depth at a later date in time.
In the first picture you will find that $50 was invested at age 18 until age 63 (45 years) with a rate of return of 10%. The ending balance of the fund at age 63 is $528,492.05 of which only $27,000 was invested.
The next picture is what would happen if that same $50 was invested, but if the person waited until 28 years old to start investing. The results are that the fund would only be worth $191,413.64 with $21,000 invested. In other words $6,000 less was invested over the ten years, which resulted in $337,078.41 less at age 63. The illustration between these two shows the power of compounding interest and the necessity to be able to start as early as possible in investing, even if it is only $50 a month.
This final picture depicts that $138 would have to be invested per year starting at 28 years old in order to have roughly the same portfolio value at age 63. Notice that the amount that was invested jumped up to $57,960 in order to end with $528,301.64.
Time is your best friend when dealing with compound interest. The longer you are able to invest will have a much greater impact on your ending balance then how much you are able to invest at a later time.
Start Saving Soon
So the answer to when you should start saving for retirement is that you should start as soon as possible. There are some general guidelines for doing this, but each person will chose to do things slightly differently. First and foremost it would be beneficial for you to have a budget for your money. A budget is nothing more than a plan that tells your money where to go and when. Next it would be wise to have an emergency fund of some sort set up. The size of your emergency fund will depend on the amount of debt you have to tackle, how volatile your work situation is, and how much money you need each month in order to survive.
When you have a plan for your money, are out of debt, and have a proper emergency fund in place you will be able to invest and save money for your future in a way that you will not be able to do if you do not budget your money, if you live in debt, and if you are not prepared for emergencies. Your choice on how you live now, will determine how you must live in the future. If you delay gratification now and learn to live on less than you make then you will be able to do so much more in the future. When you live on less than you make and learn to save your money you will be able to live a far different life in the future than what you will be able to if you do not.
Talking to an Investment Professional
If you are at a place in your life that you are ready to start investing then start looking around and talking to investment professionals. When you are talking to them make sure that you understand what it is that you are investing in. The professional should be teaching you about what you are doing, especially if you do not understand what you are doing, and they should be giving you information so that you can make a choice. If, when you are talking to them you feel like they are talking over your head, or will not explain things to you, or if you feel pressured into investing with them then you should walk away and find someone else or you will likely regret having ever invested with them.
If you would like help in creating a plan for your money based upon your goals or if you have questions in regard to your money please contact me so we can walk through your questions and put a plan in place that is practical and that aligns with your values and needs.
God bless you in your walk towards Financial Freedom.