Benefits of Saving Early for Retirement
It’s never too early to start saving. This applies to a lot of things – Saving for college, saving for your emergency fund or saving for a home. It’s especially important to start saving early for retirement.
Why? Because of the benefits of compounding interest.
Compounding means your contributions earn interest on the initial amount invested, and on the interest you accumulate over time. So, the earlier you start investing in your retirement plan, the more potential for investment earnings.
Consider this: Kim starts saving for retirement when she’s 25. She saves $3,000 a year for 10 years and then stops contributing. Kim’s total investment is $30,000. Jill starts saving when she’s 35. She puts $3,000 each year for 30 years into her 401(k). Her total investment is $90,000.
If we assume an 8% rate of return, Kim’s account balance when she’s 65 would be $472,000. Jill’s account balance at age 65 would be $367,000. Even though Kim contributed less and for a shorter period of time, her account balance at retirement is over $100,000 more than Jill’s.
Kim’s gains are the result of the earnings on the earnings from her original investment.
What if Kim didn’t stop contributing after 10 years? If she kept saving at the same rate, her account balance at age 65 would have grown to over $839,000!
No matter how many years you have until you retire, make sure you’re saving now. Even a little bit each month can go a long way!