Gen Y: Math of Early Saving

Submitted by Mary Beth Storjohann on Thursday, March 19, 2015 - 12:00pm
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If you were born between 1980 and 2000 and are part of Generation Y, have you started saving for retirement? Think you’ll be fine if you start tomorrow? Plenty of time to worry about this later, right? Wrong: Just look at the math.

It can feel like you simply don’t have enough money with rent and student loans to pay. These days you attend to expenses, bills and other financial goals and priorities because retirement is decades in your future.

Even putting away a small amount now can make a huge difference for a comfortable retirement. You might feel like you can’t afford to save now. In fact, you can’t afford to wait.

Power of interest. When you invest money, you earn interest on your accounts’ interest, just as with a savings account but at a much higher rate of return (savings accounts max out at about 0.17% interest). That’s called compound interest and it really makes a difference over a working career.

For example, Earl starts saving for retirement at age 25, investing $100 a month for 10 years. By 35, he’s contributed $12,000 and, with 6% interest compounded annually, his balance hits $16,387. Earl then doesn’t touch his account until he turns 65.

Assuming the annual return rate continues at 6%, his retirement account at that time is worth $94,118.

Let’s lengthen the savings time. If Earl contributes $100 for 20 years instead of 10, his $24,000 grows, with compounded interest, to $46,204. If he leaves the account alone until 65 (20 years later), at retirement it’s worth $148,182.

Now let’s look at Larry, who waits a decade until age 35 to start investing. Larry contributes $100 a month for 10 years until he turns 45; he receives the same 6%. After a decade, he also has $16,387. And even though he contributes and earns the same amount from age 35 to 45, his account grows to only $52,555 when he turns 65.

Ah, the late starter: If Larry takes saving up notch and kicks in $100 for 20 years, his account still only reaches $81,700 when he wants to retire – only a little more than half of the retirement account of Earl, who saved for only half as long.

Larry can’t match Earl’s savings because Earl, in both cases, gives his savings more time to compound and grow. These are extremely simple examples, but you can see that saving early makes a big difference. You can save less and still end up with more in your pocket.

Ride Wall Street longer. A longer investing time horizon also makes it easier for you to ride the inevitable ups and downs of the market. As a young adult, you’re generally able to allocate a larger portion of your investments to securities that produce a higher return but come with more-volatile assets, such as stocks.

If you wait until later to invest, you’ll need a more conservative portfolio in your retirement accounts because you’ll lack time to handle the blows to your net worth that are always possible with riskier investments.

Start now. Even if money seems scarce, putting away a small amount now can make a huge difference in your retirement.

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Mary Beth Storjohann, CFP, is the founder of Workable Wealth, an RIA in San Diego. She is a writer, speaker and financial coach who is passionate about working with individuals and couples in their 20s and 30s to help them organize and gain confidence in their financial lives. She has been quoted or featured in various industry publications on the local and national level. You can find her on Twitter at @marybstorj.

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