dcsimg
 

Who wants to be a millionaire -- in retirement? Saving in your 20s and 30s

October 24, 2010

by Scott Holsopple | MoneyRates Guest Contributor

 

This article is part of a MoneyRates.com series, 10 steps to a comfortable retirement.

Thinking about putting money away for something you won't use for another 40 years may seem unreasonable as you establish yourself in your career. When you need to pay pressing bills like credit cards, student loans, car payments and rent, it can be difficult to choose to set aside part of your hard-earned paycheck for your long-term retirement goals.

It might seem easier to just wait until you are more established and the dollars are rolling in from your well-oiled career. Plus, deciding which investments to use takes time and effort that many people aren't willing to give.

Well, there are many compelling reasons to invest as much as possible as soon as possible in your retirement plan. From your perspective as a 20-something or 30-something, the largest incentive that should inspire you to stop procrastinating and start up your retirement plan contributions is compounding.

Are you asleep yet? I think I can make it more interesting than your high school math teacher because compounding might just be the reason that you have enough money for retirement.

How compounding works: a simple example

When you have an investment that grows in value, the added value is called earnings. Compounding is the growth of your earnings. Imagine that you invest $1,000 each year. After one year, your investment has grown 7 percent to $1,070. Then the investment earns another 7 percent during the second year. Your value at the end of the second year is $2,214.90, figured with this equation: ($1,070 $1,000) x 1.07.

Now that's just two years of growth. Take the same equation over 40 years, and you're looking at a substantial and powerful tool in your quest for retirement bliss. Use a compounding calculator to see what time does for your savings.

One reason you give for not saving now is that you'll have more money to invest when you're older. You're probably right. And it's a good thing, too, because you'll need to invest a lot more money if you wait. As the chart below shows, you'll need to more than double your investment for every 10 years that you wait to start investing.

Age You Begin

Monthly Investment

# of Years to Age 65

Total Personal Contribution

Account Value at Age 65*

25

$400

40

$192,000

$1,049,925

35

$850

30

$306,000

$1,036,975

45

$2,000

20

$480,000

$1,041,853

*Assumes 7 percent annual rate of return

There is one other thing. Don't let choosing your investments scare you away from putting money away for retirement. Use an independent service like like Smart401 to recommend appropriate fund choices for you, or choose a target date fund or an asset allocation fund from the options in your plan. These are easy solutions and should take the worry out of choosing a mix of funds that will help you reach your goals.

So no more excuses. Get started today. And let us know when you hit the million-dollar mark.

Read more financial advice from our series, 10 steps to a comfortable retirement.

 

About the Author:

Scott Holsopple, president and chief executive officer, joined Smart401k as president in August 2007. Scott has focused on product enhancement and company growth. He is passionate about engaging Smart401k members in retirement planning and helping them stay in control of their personal retirement strategy.

Prior to coming to Smart401k, Scott worked for an $11 billion venture capital and private equity firm where he focused on the financial services and technology industries. Earlier in his career, Scott was an investment banker at TD Securities. He graduated with distinction from The Pennsylvania State University with a B.S. in Finance.

 

 

 

Your responses to ‘Who wants to be a millionaire -- in retirement? Saving in your 20s and 30s’

Showing 0 comments | Add your comment
Add your comment
(required)
(will not be published, required)