A while back, I gave our Foolish calculators a spin, to check how much I'd have to save to retire securely. I knew that the earlier you start to save and invest, the better off you'll be. But I didn't realize just how huge a difference a few years can make.
The numbers tell the story
Suppose you begin saving at age 45, and invest $5,000 per year for 20 years, earning 10% per year and experiencing 3% annual inflation. You'll end up with an expected $286,375 before inflation, and $204,977 after inflation. If you put all this off for 10 more years, and don't begin saving and investing until age 55, you'll have to sock away $18,000 a year -- or delay your retirement until age 75 -- just to end up with the same amount of money!
In contrast, if you begin at age 25 under otherwise identical conditions, in 40 years you'll end up with $2.2 million before inflation, and nearly $1 million after it. Delay your retirement until age 67, as many 25-year-olds today will likely end up doing, and you'll end up with more than $450,000 extra. Meanwhile, an investor who starts at age 45 will have only 22 years until they turn 67, and will have to sock away more than $37,000 per year to amass the same ultimate sum. I don't know many people who could do that.
The big picture
Are you about to bash your 50-year-old head against a wall? Please don't -- all is not lost:
- You may be able to save more than $5,000 per year. One rule of thumb is to save and invest 10% of your income, but the higher your percentage, the better off you'll likely end up.
- Even if you start investing at age 50, you have a good amount of time in which to accumulate wealth. If you can invest $10,000 per year for 20 years, earning the market's historical average return of 10%, you'll end up with more than $570,000 before inflation, and more than $400,000 after. Not too shabby, eh?
- On the other hand, remember that that 10% return is very hypothetical. Sure, it's the market's historical average, but recent events amply illustrate that you can't count on it.
Find good investments
Good returns aren't always hard to find. Even well-known companies can give you market-beating performance over the long haul. PepsiCo
And while many mutual funds underperform the market, the best of them can really pack a punch, giving you outstanding returns during good times and helping you defend your portfolio when times are bad. Until it stumbled this year, the Fairholme Fund (FAIRX) averaged annual gains of more than 18% from 2003 to 2007. Its recent top holdings included Pfizer
Whether you go with stocks or funds, don't wait. Start investing today, and get yourself on the path to higher returns.
Further fund-amental Foolishness:
This article was originally published on Oct. 3, 2006. It has been updated by Dan Caplinger, who owns shares of Berkshire Hathaway. Pfizer and Johnson & Johnson are Motley Fool Income Investor recommendations. Pfizer and Berkshire Hathaway are Inside Value picks. Berkshire Hathaway is a Stock Advisor recommendation. The Fool owns shares of Pfizer and Berkshire Hathaway. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool is Fools writing for Fools.