“Someone once told me that time is a predator that stalks us all of our lives, but I rather believe time is a companion who goes with us on a journey and reminds us to cherish every moment.” — Jean Luc Piccard
As with most powerful forces in life, the passage of time brings both good and bad. When it comes to investing for retirement, time can be either friend or foe. You can find yourself racing against it to fund your post-career years, or you can use it to your advantage. Trust me — it most definitely pays to have time on your side – to make time a companion that grows your wealth as it accompanies you through life and career.
Properly harnessed with the miracle of compounding, time can help you grow a $1 million nest egg on even a modest income. All it takes is commitment and discipline.
First let’s talk about compound growth. Compounding is the accelerated growth in value that occurs when the earnings generated by an investment are reinvested and produce even more earnings. Time is obviously critical to this process. The longer an investment can simmer on “compound” the fatter it will grow as it feeds on earnings on earning on earnings. Starting to save for retirement in your 20’s will make a huge difference in the size of your nest egg – and how much you need to contribute to get to that $1 million mark.
If you get started at age 25, you need to save just $5,346 per year to reach $1 million by age 65, assuming a 6.5% average annual growth rate. But if you don’t get going until age 35, you must sock away $10,871 per year to meet that objective. Put things off until you’re 45 and that number soars to $24,184. It gets exponentially worse after that.
Here’s another powerful illustration: If you start saving $10,000 per year at 25, you will have $1.8 million when you turn 65, assuming that 6.5% annual return. Start saving the same amount at 35 and you end up with about half as much — $919,000. Those ten years make a huge difference!
This math explains how people, including many of my clients, can retire with $1 million after careers in public service or other professions that paid moderate salaries. They started very early and prioritized savings over other spending.
I recommend devoting a minimum 20% of your gross income to savings. So, even if you make just $25,000 per year, you should be setting aside $5,000 per year. I realize this might be tough for a 25-year-old facing student debt and the start-up costs of adult life. But it can be done. All it takes is discipline – and maybe a side job. And remember, the pain is temporary. As your income grows, that $5,346 per year will sting less and less.
So, no matter your age, if you aren’t saving for retirement, start today. Make time a generous companion, not a predator.