If you're young or have only just started out in your chosen career, your retirement may seem a long way off. You might think that you have plenty of time in the future to put savings aside for your retirement, and that you don’t have to worry about it for a few years.
In fact, building a nest egg or retirement fund is much easier if you start early:
The longer your savings have to grow, the more they will benefit from what’s called compound interest, which is interest earned on previously earned interest. If you want to know more about compound interest, and how it works, you may find this article helpful: Earning compound interest in module: Savings Strategies.
Compound interest quickly adds up, and may significantly increase your savings over time. Here’s a really simple illustration to show how it works:
When Ashley is 25, she decides to put $1,000 of her savings into a retirement fund, and then add a further $100, every month, until she is 65. At 2% interest, by the time she reaches 65, she would have saved up $49,000, and earned an additional $26,473.27 in interest, making a total of $5,473.27.
If Ashley had waited until she was 35 before saving towards her retirement, then at 65 she would have saved up $37,000, and earned an additional $14,018.85 in interest, making a total of $51,018.85.
It shows that by starting sooner, Ashley manages to build savings worth 50% more for her retirement. That’s the value of compound interest.
If you are still paying back a student loan, there might seem little point in putting regular savings aside when you still have debts to pay.
In fact, it can be a good idea to treat your retirement or long term savings as just another expense or bill that you must pay each month. That way, you will get into a savings habit early on, and not be tempted to use the money for something else. If possible, you might want to have a regular sum deducted from your pay check automatically, which is deposited into your savings plan or fund.
Let’s go back to Ashley’s savings for a minute. We’ve seen how by saving $100 a month for forty years, Ashley was able to build savings worth $75,473, of which nearly $26,500 was interest.
If she had waited and only saved for 10 years, Ashley would have had to deposit $2,050 each month in order to earn roughly the same level of interest.
Extended career breaks and sabbaticals are becoming increasingly popular, and not just to start a family or have children. Many people are choosing to travel around the world or pursue a lifelong goal or ambition without waiting for their retirement for the opportunity to do it.
By putting savings aside right from the first stage of your career, you may be better placed to take advantage of a career break, and the opportunities it might bring.
The bottom line is that it’s never too early to start planning and saving for your future. Saving early may have an enormous impact on your retirement, and give you greater flexibility throughout your life. The sooner you begin saving the better.