Starting to save for retirement early in your career can significantly impact your financial well-being later. By giving your investments more time to grow, you harness the power of compound interest, potentially accumulating a much larger yield with smaller contributions over time. This not only eases the financial burden of retirement savings but also provides a longer runway to recover from market fluctuations, allowing for a more diversified and potentially higher-return investment strategy.
Let Time Work In Favor For Your Retirement
As a young investor, you have a powerful ally on your side: time. When you start investing in your twenties or thirties for retirement, you can put it to work for you.
The power of compounding. Many people underestimate it, so it is worth illustrating. Let’s take a look using a hypothetical 5% rate of return.
How does it work? A simplified example goes like this: Let’s take a look using a hypothetical 5% rate of return on a principal of $100. After a year, you earn 5% interest, or $5. Another year, another 5%, which adds $5.25 this time. In the third year, your 5% interest earned amounts to $5.51, bringing your balance to $115.76. The more money you deposit, the greater that 5% returns. Let’s look at another hypothetical example. If you were to start with a $1,000 principal in an account that earns 5% interest per year and contribute $1,000 a year to the account, you would end up with a total of $7,078.20 after five years. That’s a total of $1,078.20 earned in compound interest from $6,000 in contributions. That compounding continues, even if you stop making deposits. All you really need to do is let that money stay put.¹
The earlier you start, the greater the compounding potential. If you’re investing for retirement in your twenties, you may gain an advantage over someone who waits to invest until their thirties.
Even if you start early and then stop, you may be in a better position than those who begin later. What if you contribute $5,000 to a retirement account yearly starting at age 25 and then stop at age 35 – with no new money going into the account for the next 30 years? That is hardly ideal. Yet, should it happen, you still might come out ahead of someone who begins saving for retirement later.
Contact Retirement Plan Advisors
How much have you saved for retirement? Are you flagging savings for expected and unexpected healthcare expenses? Consult with your RPA Financial Advisor to ensure your retirement strategy accounts for critical costs such as medical expenses. Also, follow RPA on LinkedIn and Facebook to stay up-to-date on retirement solutions for public sector employees.
Matthew Martin, CFP®, Certified Financial Planner
248.767.3828
[email protected]
Citations
1. This is a hypothetical example used for illustrative purposes only. It is not representative of any specific investment or combination of investments.
The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security. Copyright FMG Suite.