Nearly every American has a dream retirement. It often includes leaving work while you're still healthy enough to be active and independent, planning to buy a boat, RV, or vacation home, or simply spending as much leisure time as possible. And after decades of dedicating most of your waking hours to your work, enjoying the fruits of your labor is a laudable goal.
The stark reality is that far too few of us fully reach our retirement dream, and for a variety of reasons. But when you get right down to it, the vast majority of Americans who don't enjoy an ideal retirement failed to take steps that would have made a big difference. Frankly, they made mistakes that caused them to fall short.
But there's one mistake above all others at the heart of people's failure to achieve their retirement goals: not starting early enough to contribute to their retirement savings.
Time really can be worth more than money
When it comes to arriving at retirement with the most money, the best thing you can do is start putting away as much as you can as early as you can. It's truly that simple. The difference between starting young and putting it off can be enormous.
For instance, if you started investing $2,400 per year in a low-cost S&P 500 index fund at age 30, you'd have about $715,000 at age 65, based on the market's historical average rate of return of approximately 10%. If you put it off until 40, that same $2,400 per year would be worth only around $259,000 at age 65. But here's the real kicker: That extra $456,000 would have been generated from only $24,000 out of your pocket.
It's the extra years in the market that allows your money to take advantage of compounded growth and deliver the big payoff. If you delay to age 40, you'd need to kick up your contribution to around $6,600 per year -- an extra $81,000 -- to arrive at retirement with a similar $715,000 balance.
Time smooths out your returns
But it's not just about the power of compounding growth. The longer you invest and regularly contribute, the better your odds of capturing the best returns. The market has its ups and downs, and it's impossible to predict when they'll happen.
If you start contributing early and regularly and invest through every part of every cycle during your working years, the law of averages will be in your favor. If you keep putting it off, waiting for the next crash, you'll miss out on a lot of great returns.
Just imagine if you were one of the people who sold at the bottom in 2009 and sat on the sidelines for the past decade, watching the market more than quadruple in total returns:
Even from the pre-Financial Crisis peak, the market has more than doubled in total returns:
By steadily contributing to your retirement investments for as many years as you can and through every kind of market, you'll avoid the mistake many people made over the past decade: missing out on an historically profitable bull market while waiting for the next crash. At this point, even if the market falls by half, you'd still be far ahead of its 2007 peak.
It could help you avoid risky mistakes later
Ideally, as you approach retirement, you would start shifting some (not all) of your retirement assets out of stocks and into bonds in order to avoid the extreme volatility that can wipe out years of gains in only months. This is particularly important with assets you'll be counting on selling in the next few years for income.
Unfortunately, far too many people see retirement quickly approaching and realize they've saved far too little to meet their needs. Instead of reducing their exposure to highly volatile investments, they go in the opposite direction, making risky bets on penny stocks, day trading, or using other "fast-money" schemes that rarely deliver extra gains and often result in losses.
By starting early -- or accelerating your retirement saving if you're starting a little later than planned -- you can build up a nest egg that meets your needs and keeps you from feeling the need to make risky moves to pump up your returns.
Start as soon as you can (that means now)
Even if you're not 30, start contributing as much as you can to your retirement savings now. Whether it's maximizing the company 401(k) (and probably getting some matching money from your company), contributing to a Roth IRA, or starting a SEP IRA or self-employed 401(k) if you're self employed, there's no good reason to put it off.
The longer you wait, the more money it will take to reach your goals. It's that simple.