When you’re investing for retirement, it’s best to have time on your side. The sooner you begin investing, the more time your retirement fund has to potentially grow.
Case in point
Jill begins investing in a retirement account when she’s 30.* She invests $200 a month in the account for 35 years, until she’s 65, for a total investment of $84,000. Jack waits until he turns 40 to start investing in a retirement account. He invests $400 a month — twice as much — for 25 years, until he’s 65. His total investment is $120,000. Jack and Jill’s accounts both earn an average annual return of 6%.
At retirement, who do you think has more money? If you said Jill, you’re right. Jill has about $285,000 in her account. Jack has slightly less, about $277,000 — even though he invested $36,000 more. If Jill invests the same amount as Jack — $120,000 or about $286 a month — over her 35 years, she could have about $407,000 at age 65.
Compounding makes the difference
What’s Jill’s secret? Compounding. With compounding, first you earn income (interest, dividends or capital appreciation) on your initial investment. The next period, you earn more income — on your original investment and on any income you earned during the last period. All things being equal, the longer you let your investment earnings compound, the more money you could potentially have in your retirement fund.
To help increase the impact compounding may have on your retirement savings and investments, you may want to:
Start saving and investing as soon as possible. The longer your money can potentially benefit from compounding, the better. So, if your employer offers a tax-deferred retirement plan, such as a 401(k), consider joining as soon as you can. If you don’t have a plan at work, contribute to an Individual Retirement Account (IRA). Or you can contribute to both types of accounts if you like.
Save and invest as much as possible. While setting aside even a small amount of money toward your goal is helpful, try to put away more if you can. Over time, additional savings can increase the likelihood of achieving your retirement goal.
Don’t stop now
At times, current financial needs may cause you to consider stopping your retirement account contributions for a while. But you should try to find another source of money to meet your immediate needs. While investment earnings in your account will still compound, you won’t get that extra boost new contributions can give you.
* This is a hypothetical example used for illustrative purposes only. It is not representative of any particular investment vehicle. Earnings are compounded monthly. Your investment performance will be different. Source: NPI, 2010.
FINRA Reference #FR2011-0315-0296/E
Christopher A. Perme is a registered representative of and offers securities, investment advisory and financial planning services through MML Investors Services, Inc. Member SIPC. Supervisory Office: 1660 W. 2nd Street # 850, Cleveland, OH 44113. 216-621-5680.