September 25th, 2009
The best piece of retirement advice I have ever received was from my dad, “Save as much as you can as early as you can”. At the time I didn’t really understand the importance of those words since retirement would be around 40 years away from the time I received it but saving early allows you to build up tax deferred compound returns for many years and have a comftorable retirement nest egg.
Here is an illustrative example that shows it’s important to start saving early.
John starts saving $3,000/year for 10 years starting from when he is 21 and stops contributing after the 10 years. When he retires he has over $1.45 million dollars saved whe he retires (Johm retires at 65 and received a 10% rate of return/year).
Sally starts saving $3,000/year starting from when she is 30 and continues contributing until she retires. Sally has over $0.97 million dollars saved whe she retires (Sally retires at 65 and received a 10% rate of return/year).
As you can see from the above, John has only contributed $30,000 in total but ended up with more in his retirement account than Sally who contributed over 3 times what John contributed. This is due to the time value of money. John’s money was sitting in his retirement account longer, which gave his account a lot more time to increase in value.