November 25, 2013
Recently I have been discussing the strength of compounding interest with both young and first-time investors. Sacrificing a portion of your paycheck at a young age for retirement can be an overwhelming idea. It's very easy to overlook the importance of building your nest egg when beginning your career.
Since I am a visual person, I figured an example would be the best way to drill home my point. For this example, we will use age 65 as the retirement age for both investor A and investor B. Investor A will begin contributing to their retirement savings at age 25 while investor B will begin at age 35. Investor A will contribute $250 on a monthly basis, while investor B will contribute $300 monthly in an attempt to make up for lost time. Each investor will have an assumed annual rate of return of 8%.
Contributing for 40 years, investor A built a nest egg of $777,000 to fund their retirement. Investor B, contributing for 30 years with an extra $50 per month, will retire with a nest egg of $408,000. The difference: $369,000.
Despite contributing more every month, investor B's nest egg was slightly over half of what investor A was able to accumulate. Sacrificing at a young age is never easy, but as shown by this example it can be incredibly rewarding. The sacrifices you make may mean that dream vacation you have always hoped for, the summer lake house, or simply more money to spoil your grandkids. Even if it is only $50 a month at first, a little goes a long way over the course of 40 years. One thing is certain, although we can always increase our contribution amount, we can never make up for lost time.
Ethan Wade, Financial Advisor
(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).