Do you find yourself repeatedly saying you'll get serious about saving for retirement later in life? If so, you're not alone. It's easy to spend your time, energy, and money on taking care of current expenses. The problem is, all too often you wind up not saving anything for the future.
Postponing saving for your retirement can prove costly though -- costlier than you may realize until it's too late. Here's a visualized look at the cost of constantly kicking the savings can down the road.
For better or worse, you look like one of these investors
No hypothetical scenario will ever perfectly reflect your personal situation, but that's not the point. The bigger message to glean from the following number-crunching is that doing nothing can cost you -- a lot.
To this end, for the purpose of this illustration, we'll compare four different investors' retirement savings plans. To keep it fair, though, we're going to put all four hypothetical investors on the same financial footing with the same opportunity: They'll all have 30 years to save for retirement, access to a simple S&P 500 (^GSPC 0.32%) index fund that averages an annual return of 10% within an individual retirementy account (IRA), and $60,000 to invest during that 30-year time frame (but no more than $6,000 can be invested in any given year). Not only is this a fair distribution of opportunities, it's a framework most people can relate to.
Let's see how different investors fare with the same tools.
Molly: Starting small, keeping it steady
Molly is a 28-year-old florist. She loves her job, but she also only wants to work another 30 years so she can retire at the age of 58. She makes OK money and can sock away $2,000 every year she works until then.
It's a slow start, but investing $2,000 per year and earning an average of 10% per year will leave Molly with roughly $360,000 at the end of her 30-year career. Not bad.
Data source: Calculator.net. Chart by author.
Notice how most of Molly's account growth took shape in just the last few years of her savings period. By that time, she was starting to earn some serious money on her repeatedly reinvested gains.
Joe: Starting (very) small, then ramping it up
Joe's a 25-year-old electrician who just started his own business. He's a small, solo operation for the time being and will only be able to come up with $1,000 per year for the first 10 years he's in business. He knows his business will get bigger in the future, though, and he's able to scrape together $2,000 per year during the decade after that.
During the third 10-year stretch he's in business, he's able to invest $3,000 a year in an index fund held in an IRA. By the time Joe's ready to retire at age 55, he should be sitting on a stash worth roughly $260,000. That's not bad either, but that's still about $100,000 less than Molly's account value.
Data source: Calculator.net. Chart by author.
Teddy: Backloaded
Then there's Teddy, an aspiring 30-year-old actor who won't get any major roles for the first 20 years of his 30-year career. Ergo, he won't be saving anything until he turns 50 years old 20 years from now. That's when he'll start landing a handful of paying parts and television commercials, however, and can put away $6,000 per year during the last 10 years of his 30-year saving period.
While that's a healthy annual contribution, his IRA will only be worth around $105,000 by the time he's ready to retire at the age of 60.
Data source: Calculator.net. Chart by author.
It looks like Teddy's going to have to continue auditioning for older characters.
Melissa: Frontloaded
Last but not least, there's 25-year-old Melissa. Melissa's a recent law school graduate and full-time lawyer right now. She plans on going to part-time work when she's 35, however, so she can take a more active role in raising the kids she intends to have then.
Melissa knows the bulk of whatever she's going to save for retirement is going to have to be earned and invested within the next 10 years. Fortunately, she currently makes enough to sock away $6,000 per year. By the end of that 10-year stretch, the account's only worth $105,000. But, 20 years later when Melissa turns 55, her IRA will be worth more than $700,000.
Data source: Calculator.net. Chart by author.
And again, that's without adding any additional funds after her yearly contributions of $6,000 while she's working full time during the first 10 years of her career.
Connecting the retirement savings dots
Are none of the numbers above quite yours? That's not the point; the trajectory of the charts are. Even the smallest annual contributions can become a large sum of money without any trading gimmicks or heroic gains.
The key is time; the more you have and the more you use, the better off you are. Conversely, the longer you wait to get started, the more it exponentially punishes you.
Data source: Calculator.net. Chart by author.
So, no matter where you are in life, don't wait! At least do something -- anything -- today, no matter how small of a step you take. The hardest part is just getting started, but you can get started with just a few hundred bucks.
