Think You’re Too Young to Worry About Retirement? Put Time on Your Side

Consider two co-workers, Jane and Nick, both of whom are eligible to participate in the company retirement plan. For the first ten years she’s employed, Jane puts $100 into her retirement account each month. Then she stops. Nick, on the other hand, waits ten years to start putting money into the retirement plan. But once he starts contributing $100 a month to his account, he continues making these monthly contributions until he retires, 30 years later. Who ends up with the larger retirement nest egg at age 65?

Even though she contributed less money than Nick, Jane accumulated a much larger retirement fund.

How can this be? Jane’s money had more time to grow. The reason lies in the power of compounding - the effect of earnings on earnings. In this example, compounding means that when Jane or Nick invested $100 each month for one year, and earned an average annual return of 8%, compounded monthly, the account grew to $1,253. The end of the second year, the returns earned were calculated not only on the $1,200 in contributions made that year, but also on the earnings already made on the first year’s investments. It may seem like a small difference at first but, as Jane and Nick found out, the effects of compounding are powerful over time.

Although it’s never too late to start investing for your retirement, it’s also never too early. If you do have a long time until you retire, take advantage of it. Time is on your side.