To many young people retirement seems a long way off with plenty of time to start thinking about planning later. But if you've ever heard the expression, said with regret, "If I knew then what I know now..." think about it seriously and consider what the consequences could be of leaving retirement planning too late. Start saving now and avoid regret and a poor lifestyle later.
Let's take a look at an example of the early saver versus the late saver. The use of the magic of compound interest will astound you...Albert Einstein called compound interest the "eighth wonder of the world".
Jacqui and Carrie are old school friends. After attending university together they decide to travel overseas. Carrie spends the next 11 years working and living overseas but after a year away Jacqui returns. Jacqui starts a new job and saves hard for her new home. At the same time she is putting money aside for long-term goals. It's only $100 a month as she puts everything else into her home account. She receives an average of 7% p.a. on her money over the lifetime of the investment. After 10 years Jacqui stops her investment but leaves it to gain interest.
In the meanwhile Carrie returns and starts her saving plan of $100 a month. She saves regularly for the next 30 years earning the same rate of return as her friend Jacqui. This is what each of their savings looks like:
- Jacqui in year one has $1,242 and by year ten has accumulated $17,160 before she stops investing any further. Carrie has no investment by year ten.
- Jacqui has invested no more money but by year 40 has accumulated $130,626 while Carrie has only achieved $117,320 in year 40 (having started investing ten years after her friend). A difference of $13,306.
- Jacqui has only paid in $12,000 over 10 years but Carrie had to invest $36,000 to achieve her total sum invested and she has saved for 30 years!
You'll notice that Jacqui has invested less over the period but has ended up with more at the end of the term -- interesting don't you think? Imagine what would have happened if Jacqui restarted her investment. Compound interest certainly is a wonder!
This simple example clearly shows that planning for retirement should start early. It becomes harder the longer you leave it. Take advantage of your 401k plan through your employer if in the USA, start a KiwiSaver scheme in New Zealand. Wherever you live, plan for retirement and start saving now!
