Photo: BearFotos (Shutterstock)
It’s never too late to start saving for retirement, but anyone who starts early sure does get a huge advantage. The reason for this is compound interest, which we’ll run the numbers on below. If you’ve been waiting to invest in your retirement until you check off other financial goals (cough cough, students loans), let’s breakdown why you should consider setting aside at least some savings. And if you have a teenager who rolls their eyes at the idea of contributing part of their very first paycheck to their far-off retirement, here’s how you can explain to them why it’s so important to start saving as early as possible.
Why saving early is so important
Simply put, compound interest means the interest on an investment grows exponentially—rather than linearly—over time. What this means for a retirement account like a 401(k) or Roth IRA is that every little bit you contribute goes a long way, especially compared to a traditional savings account. The key is that with compound interest, how early you start saving usually outweighs how much you contribute. Even an investment left untouched for decades can keep growing.
Let’s take a look at some specific scenarios that show how compound interest works for you. These all assume a moderate 6% annual investment return on their retirement funds, which is around what most return on investment calculators will be set to automatically.
Scenario 1: You save $30,000 over a period of 20 years, but you started at age 35. You stop contributing at age 55. When you retire at age 65, you’ll have around $53,725, thanks to the additional 10 years of compound interest that allowed your funds to grow even without you touching them.Scenario 2: You save $30,000 over a period of 20 years, but you started at age 25. You stop contributing at age 45. When you retire at age 65, you’ll have around $96,214, thanks to the additional 20 years of compound interest that allowed your funds to grow even without you touching them.
Scenario 3: You save $30,000 over a period of 20 years, but you started at age 15. You stop contributing at age 35. When you retire at age 65, you’ll have around $172,305, thanks to the additional 30 years of compound interest that allowed your funds to grow even without you touching them.
G/O Media may get a commission
Of course, the best case scenario is that you start saving early and never stop investing. But the scenarios above demonstrate how important time is as a factor, and how any savings at all—even if left untouched for years—can go a long way.
To run the numbers yourself, Investor.gov has a calculator that allows you to test out different saving scenarios that work for your financial situation.
The bottom line
Encourage your teenagers and young adult children to contribute to a Roth IRA or 401(k) from their very first paycheck—and they’ll thank you later as they watch those numbers grow and grow. And remember that no matter your age, you can still take advantage of compound interest, too, even with a small initial investment. What matters is that you start to save and invest ASAP. Check out our guide to how much you should have saved at every age.
