Here are 2 big advantages to starting your retirement savings early:
1. LESS $ PUT AWAY EACH MONTH
Let’s say you’re 40 years old with little to no savings for retirement, but you’d like to have $1,000,000 when you retire at age 65. Twenty-five years may seem like plenty of time to achieve this goal, so how much would you need to put away each month to make that happen?
If you were stuffing money into your mattress (i.e., saving with no interest rate or rate of return), you would need to cram at least $3,333.33 in between the layers of memory foam every month. How about if you waited until you were 50 to start? Then you’d need to tuck no less than $5,555.55 around the coils. Every. Single. Month.
A savings plan that aggressive is simply not feasible for a majority of North Americans. Most are just getting by, living paycheck-to-paycheck. So it makes sense that the earlier you start saving for retirement, the less you’ll need to put away each month. And the less you need to put away each month, the less stress will be put on your monthly budget – and the higher your potential to have a well-funded retirement when the time comes.
But what if you could start saving earlier and apply an interest rate? This is where the second advantage comes in…
2. POWER OF COMPOUNDING
The earlier you start saving for retirement, the longer amount of time your money has to grow and build on itself. A useful shortcut to figuring out how long it would take money in an account to double is the Rule of 72.
Never heard of it? Here’s how it works: Take the number 72 and divide it by the annual interest rate. Assuming the interest rate is compounding annually, the answer is approximately how many years it will take for money in an account to double.
For example, applying the Rule of 72 to $10,000 in an account at a 4% interest rate would look like this:
72 ÷ 4 = 18
That means it would take approximately 18 years for $10,000 to grow to $20,000 ($20,258 to be exact).
This formula really shows the value of a higher interest rate, doesn’t it? Also keep in mind that this is just a mathematical concept; interest rates will fluctuate over time, and taxes, expenses, or fees associated could make the amounts lower and the time to double would be longer.
So, getting a higher interest rate is just as important as saving monthly. And, protecting that interest rate could be even more important. Need help calculating your magic number to reach your retirement goal? Schedule a virtual consultation with me.