Time Is on Your Side
Q: I'm 20 years old. Do I really need to start saving for retirement now? I mean, I've got decades to go before then. I think you Fools are just obsessive about the future. -- R.M., from the Internet
A: Hey, don't let us interfere while you're livin' la vida loca. If you've got a few decades to go before retirement, that's plenty of time to outgrow your first pop group, start a solo career, and net the millions of dollars in record sales you'll need to build your swanky retirement estate in the Caribbean.
Of course, you might win the lottery, too.
OK, now you can tell we're pulling your leg. But in all seriousness, we Fools don't worry about retirement. (We worry about the millions of people who throw their money away on the lottery and the plight of hunger in the U.S., but that's another column.) We do grab opportunity when we see it, though. We know it's a lot easier to set up a cushy retirement for ourselves by starting earlier rather than later. The simple reason for this: compounding interest over time, or, in the case of the stock market, compounding returns.
With such a long time frame ahead of you, the stock market is the best place to put your retirement savings. Over decades, the volatility of stocks is smoothed out and their direction is upward. Without much thought or effort, you could gain the 11 percent historical compounded return of the S&P 500 by putting your savings in an index fund.
If you started from scratch today, at the age of 20, and invested $125 per month for 40 years at 11 percent per year, you'd be a millionaire at age 60. That's right, $60,000 invested will become $1,084,870. If you were Ricky Martin, however, and saved $20,000 from your Menudo days and then managed to put away just another $250 a month, you'd have $3,766,430 after 40 years. And that's just earning the market's average compounded return.
Of course, you may not have the talents or looks to become a pop hero. But over the course of your lifetime, we bet -- nay, we know -- that you'll be able to sock away more than $125 per month.
The most important factor to take away from this, though, is the importance of time, which you have on your side, Fool. Time makes all the difference in the world when your money is compounding. In our earlier example, investing $125 per month for 40 years grew $60,000 of your lifetime savings into $1,084,870. If you started when you were 55 by plunking down a lump sum of $60,000 at 11 percent, you'd have only $170,365 at age 65. Tick tock, tick tock.
If you're living a crazy life right now and can't afford to put any money away, there's no need to obsess over retirement. But it is to your advantage to start as early as you can. After all, there's no guarantee that your next record is going to sell 4 million copies.
WHAT NOW? Take one week and write down your every expense. Account for every mocha frappalatte and every body piercing you pay for. Chances are when you review that list a week later you'll spot some items you could cut out of your "budget" to help start building your future fortune.
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