Did you know that if you start saving money for retirement early, you can fairly easily be a millionaire by the time you retire? It's known as the power of compound returns. The longer you have to save, the longer your money has to grow (and then grow again on the growth).
Thankfully, my dad taught me about the power of compound earnings when I was young. So, as soon as I was able to open a 401(k) account, I started putting away 15% of my income.
I knew that I wanted to stay at home with any kids that I might have in the future, and I knew that when I didn't have an income it was going to be more difficult to add money to my IRA. However, by maxing out my 401(k) during the few years that I was a part of the work force, it's continued to grow over the years while I haven't had an income and will continue to grow until I retire.
For example, if you were able to save just $500 when you were 25 and let it grow for the next 40 years (without adding any additional money), you would have just over $3,500 at age 65 (assuming a return rate of 5%). Imagine if you were able to continue to add money over time for a much greater effect!
Here are some reasons you should start saving for retirement now:
- Time is on Your Side – Like I mentioned above, the earlier you start saving and investing, the longer your money has to continue to multiply with compound earnings. However, if you didn't get a chance to save and invest when you were younger, start saving now to take advantage of the time you do have left to earn compound returns.
- You Can Ride Out the Market – As part of investing in the market, you're going to have good years and bad. For example, my IRA took a big hit in 2008 when the stock market tanked. However, it was just a loss on paper, and it boomed back even higher in the years since then. If you invest for the long haul, you have time to ride the market through its good times and bad without stressing out about how your money is performing.
- You'll Likely Depend on your Retirement Savings during Retirement – Unlike today's retirees where many of them have pensions and Social Security, you'll likely need to depend mostly on your own retirement savings to live during retirement. Pensions are rarely offered anymore and Social Security may or may not be available when you retire (or at a greatly reduced amount). So, it's important to plan and save now for retirement so you can afford your standard of living in the future.
What about you? Did you start saving for retirement early? If not, are you ready to start saving now?