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 with even big stocks like Citigroup
(NYSE:C)down more than 80% in the past year, you can't count on it -- especially over short periods of time.
Find good investments
But over the long haul, good returns aren't always hard to find. Even well-known companies can give you market-beating performance over longer periods of time. Kimberly-Clark
And while many mutual funds underperform the market, the best of them can really pack a punch, protecting you from the worst of it when most stock investors are suffering big losses. For instance, the Yacktman Fund (YACKX) has beaten the S&P by nine percentage points annually over the last decade and is up over 28% so far in 2009. Its recent top holdings included AmeriCredit
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 Oct. 3, 2006. It has been updated by Dan Caplinger, who doesn't own shares of the companies mentioned. Coca-Cola and Wal-Mart are Motley Fool Inside Value selections. Kimberly-Clark and Coca-Cola are Motley Fool Income Investor picks. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool is Fools writing for Fools.