At allfinancialmatters.com, I ran across an interesting calculator titled "The Cost of Waiting." Examples of how it pays to start saving early rarely fail to amaze me. Here's one example, featuring an expected annual return of 10% and annual inflation of 3%:
|
Save Now ... |
or Pay Later ... | ||
|---|---|---|---|
|
Age to begin saving |
25 |
Age to begin saving |
40 |
|
Retirement age |
65 |
Retirement age |
65 |
|
Number of years until retirement |
40 |
Number of years until retirement |
25 |
|
Amount saved per year |
$2,000 |
Amount saved per year |
$9,001 |
|
Expected amount at retirement age before inflation |
$885,185 |
Expected amount at retirement age before inflation |
$885,185 |
|
Expected amount at retirement age after inflation |
$399,270 |
Expected amount at retirement age after inflation |
$399,270 |
Notice how you end up with the exactly same sums at retirement, whether you start saving and investing at age 25 or 40? Well, keep studying the table. See anything jarring? Look closely, and you'll see that the amount you can amass by investing just $2,000 per year if you start when young is the same sum you'll end up with if you wait 15 years -- though you'll have to more than quadruple your investments, to over $9,000 annually, if you opt to wait.
The difference is striking, even with shorter delays. If you save $2,000 per year starting at age 40 and earn 10% on it, with 3% inflation, by age 65, you'll have accumulated more than $125,000, after inflation. If you put off that saving and investing for just five years, commencing at age 45 and ending at age 65, you'll have to save and invest $3,434 each year. That sum is more than 70% higher than $2,000 -- and due to simply putting things off for five years.
If you're late to the game, that's no excuse to keep waiting. Remember that while the market has averaged 10% growth annually (excluding inflation), you may be able to do considerably better by investing in some carefully selected mutual funds or stocks. ExxonMobil (NYSE: XOM), for example, has averaged 12% annual growth over the past decade, while Yum! Brands (NYSE: YUM) has averaged nearly 18%.
If you don't think you can find those winning stocks on your own, hire someone to do it for you. Many mutual funds have put together impressive track records. For instance, the T. Rowe Price Media and Telecommunications (PRMTX) fund has averaged more than 13% since 1998, and was recently invested in Leap Wireless (Nasdaq: LEAP), Electronic Arts (Nasdaq: ERTS), and International Game Technology (NYSE: IGT).
