The Effect of Time
An important thing to keep in mind when planning for your financial future is the effect of time.
If you were to start investing for retirement at a younger age, the amount you’d have to allocate to retirement each month is a lot lower than later in life.
As an example, let’s say you estimate that you are going to need a million dollars by your goal retirement age of 65. You’ve currently just turned 30 and you’re trying to decide when’s the best time.
Another assumption you’ve made is that the market rate of return will be 8%. Historically, this isn’t too far off.
If you were to start saving for retirement right away at 30, you would need to set aside $470 each month to meet the million dollar retirement goal. If you were 40, add over $600 to that monthly amount. At 50, you’re looking at investing $2,970, over 6 times as much as you’d have to set aside at 30.
| Retirement Age | 65 |
| Retirement Goal | $1,000,000 |
| Market Return | 8% |
| Current Age | 30 | 40 | 50 |
| Monthly Investment | $470 | $1,100 | $2,970 |
Now $470 may seem unachievable at 30 because salaries are still notoriously lower at the beginning of one’s career.
Let’s say you’ve analyzed your budget as many ways as possible and what you can comfortably invest for retirement is $250. Applying the same assumptions as before, if you were to set aside $250 a month at 30, you could have over $500,000 at 65; if you start at 40, it would be over $200,000 while at 50 you would have a little bit over $80,000.
| Retirement Age | 65 |
| Monthly Investment | $250 |
| Market Return | 8% |
| Current Age | 30 | 40 | 50 |
| Amount at Retirement | $535,600 | $227,200 | $84,400 |
The way life goes, you would likely use some mix of these 2 scenarios. You may not be able to allocate $470 each month starting at 30 but you may be able to start with $250 and then increase it once your salary increases or your debt is paid off or whatever changes occur that make you feel more comfortable. Like everything personal finance, these decisions are unique to you and have to take into consideration your comfort level.
The important takeaway here is to compare the compounding effect that time have on our investments and worth considering any time you’re investing or saving!