We all know that starting early with your retirement planning will ensure you have a handsome pot built up for the future. But the earlier you start really is what will make your investments snowball over time, all to do with the simple principle of compound interest.
Let’s make things easier by looking at graphs from NerdWallet that visualise the power of saving from different ages. Each graph shows what monthly amount needs to be put away to save $1 million by the time you reach 67, on the assumption you start with zero savings and yield various average annual returns.
Here’s what it would look like to start your journey at 25:
Now, have a look how this changes just 5 years later when you are 30:
The leap is enormous and only continues to increase the later into your life that you start. But why does starting earlier have such a great impact? As previously mentioned, it’s all to do with the power of compound interest.
Time is Money
Compounding makes your pot of funds grow faster than simple interest because on top of the gains on the money you invest, you will also earn returns on those returns over time. Let’s call this “the snowball effect”.
Keeping regular contributions over many years will see your retirement pot build up very quickly; starting as early as you gives your pot more years to grow and to reap the benefits of compound interest.
Even if you’re starting small, it’s best to just get started. If you’re over 25 and have been thinking about your savings — you should have started yesterday! Invest young and compound interest will make your retirement pot full to the brim.
Yikes! Am I too late?
It’s never too late to start putting away regular contributions for your retirement, but starting sooner is key.
Young? If you can start putting away a around $200 dollars a month into an untouched, regular plan, your pot will grow up rather nicely and start building a strong portfolio.
Or perhaps you have a lump sum to start with? Check out how a $10,000 lump sum can grow all thanks to compounding:
Simply allowing your investment to earn gains from compound interest, you can double your initial $10,000 lump in 10 years, assuming an 8% return, by simply letting the interest grow.
It’s really quite simple — the sooner, the better.
If you’re looking for some friendly advice or for help setting up a savings plan, drop me an email at thomas(at)absolutefsl.com to see how I can help!
