At the very least, read until you get to the pretty graph below. If your eyes glaze over after that, feel free to get back to your YouTube video of cats eating ice cream.
In my previous post talking about the difference between a 401(k) and an IRA I mentioned that regardless what type of retirement account you set up, it’s really important to start saving as early as possible. Now it’s time to drive that point home as hard as I can.
I can’t stress this enough – even if you can’t save a lot of money, just contribute as much as you can each month. One incredibly important fact is how detrimental it can be to wait to contribute to a retirement account. Let me throw some numbers at you so you can understand how this works.
Here is a poignant image taken from Vanguard that shows two different people who start contributing to an invested retirement account 10 years apart.
The image illustrates exactly why starting earlier with smaller amounts outweighs larger contribution amounts later.
In the situation above, you could invest half the amount of your friend and for half as long and still end up with a larger amount at retirement simply by starting 10 years earlier.
This graph assumes you both invest in the exact same portfolio and those investments grow overall 6% year after year, simply to illustrate the point. Really think about that…simply starting to invest now means you could end up with more in retirement than someone else who invests twice as much of their money as you but waits longer to start saving.
The reason starting earlier matters so much is because as your retirement accounts grow, the money you earn allows you to buy more investments (bonds/stocks/etc) which allows your money to grow even faster. This is the idea of compounding.
So Aaron, if I’m 35 and haven’t started investing should I pretty much give up now? Absolutely not. The best day to start contributing to a retirement account is today. Yes, you will need to save more to reach a healthy amount in retirement than someone who started earlier but you can absolutely do it.
Aaron, my company does a match on my 401(k), what does that mean? That means you literally get free money from you company if you contribute to you retirement account. They will put in some percentage of their own money into your account based on how much you contribute. If at all possible you should at least be contributing enough to get this free money.
Ok, this is all cool but how do I even start a retirement account? It sounds complicated and like a pain the a** to do. It may not be the most exciting process, but it isn’t difficult. If you can walk through TurboTax to get your taxes done each year, you can definitely do this. If you company offers a 401(k), 403(b), or something like those then it is likely as easy as contacting HR and letting them know you’d like to contribute a percentage of your paycheck to that. If you aren’t provided a retirement account option through work, you can start up an IRA. Take this advice with a giant grain of salt, and do your research first, but if you are looking to start a retirement account I would recommend at least taking a look at Vanguard’s target age retirement accounts. Give them a call if you have any questions about how those work. Feel free to contact me directly if you want to know my reasons for mentioning that IRA.
There are many considerations to keep in mind while picking a retirement account, I will write a completely separate post in the next month or so on that topic.
CORE MESSAGE – please take retirement planning seriously today so that you aren’t scrambling in the future. My challenge to you is to start contributing whatever amount you can to a retirement account today. $25/paycheck, $200/month, whatever. Just start today.