4Q2018 | Ages 30 – 49
Start Saving Now
Time after time when explaining the benefits of saving for retirement, we tend to focus on the 21-year-old employee fresh out of school that starts to save for retirement immediately and ends at age 65 with a large sum saved. That is a great conclusion for that individual. But what about the employees that may have put saving for retirement on the backburner for a few years? You can’t go back in time. At least to my knowledge, that ability has yet to be proven. So, before you come to the conclusion that there is no way you can start saving for retirement now, I’m here to tell you you’re wrong.
Start saving today. Make that initial decision to commit to yourself and your future, and prepare for the factors that come with saving for retirement. The two greatest factors to be considered are 1) the amount you elect to save each year and, 2) the time horizon that savings has to work for you – also known as the sweet benefit of compounded interest.
The concept on interest is not new, but most of us think of simple interest. There is a big difference between standard simple interest and compounded interest available in your retirement plan. If you start by saving $100 with a 10% annual interest (or market gain), you end the year with $110. That is true for both simple and compound interest. However, in year two, under simple interest you gain another 10% on your principal amount leaving you with $120. But under compound interest you earn 10% on the full value of your account ($110) giving you $11 interest and ending year two at $121. Now, a $1 advantage doesn’t seem like much after such a short period, but this is when the power of time works to your advantage. In the same scenario after 5 years the simple account balance totals $150 while the compound account equals $161. After 10 years the two accounts total $200 and $259. After 20 years the amounts are $300 and $672. More than double!
Now that we understand the power of compound interest, you can see the advantage of starting to save and taking advantage of this as early as you can in your retirement plan. Consider an example where a participant is saving $200 per month with 6% interest per year and saving until age 65, but delays starting by one year. A 25-year-old will forfeit over $24,000 in potential future account balance by waiting one year until age 26 to start participating. A 35-year-old will forfeit over $13,000 by waiting until age 36, and a 45-year-old will forfeit over $7,000 by waiting until age 46. In these scenarios, the extra $1,200 you received in your pay check by not saving for retirement for one year is much less than what that amount can grow to over time.
So, though we can’t go back to when we were 21, don’t let age be a road block. Start now, start today, and make the decision to either begin saving or increase your savings amount so you can better your chances for a successful future.
Rich Eagar, AIF®, CRPS®
Vice President, Retirement Practice
This commentary is for informational purposes only and does not constitute investment advice nor reference the appropriateness of any individual investment alternative.
Advisory services offered through Prime Capital Investment Advisors, LLC. (PCIA) a Registered Investment Advisor. Prime Capital Investment Advisors doing business as Qualified Plan Advisors, “QPA.” 6201 College Blvd., 7th Floor, Overland Park, KS 66211.