Those all are chores that we know should have been done yesterday, but we think can wait until tomorrow.
The garage, bedroom and garden can wait. Retirement savings can’t.
Saving for Retirement Takes Time
Time is an ally or an enemy with investments. You choose which it will be. There is dramatic evidence that doing it today will produce results that overwhelm whatever gain you may realize by doing it tomorrow. Any online investment calculator will confirm that.
For example, if you start a retirement savings account at 55 and contribute $3,000 a year ($250 per month) for the next 10 years with a 7 percent return, you will have $43,523 by time you reach retirement age of 65.
That’s the kind of return you get by waiting for tomorrow.
However, if you start at 25 and contribute the same amount — $3,000 annually for 10 years at 7 percent return — your retirement savings account would be worth $353,259 when you reach 65. That is without you contributing a penny after the age of 35.
The $310,000 difference is the result of time and compounding, a wealth-building phenomenon where each year’s investment gains generate more gains the next year.
“The reality of investing is the more time you have, the better the chances are you will succeed,” Matt Kelly, senior adviser at Morgan Stanley said. “Investing is a marathon, not a sprint, so it just makes sense to give yourself as much time as possible to reach your goals.”
Where You Save is Not Nearly as Important as When You Start Saving for Retirement
Where to open a retirement savings account is totally subjective. Knowing someone you can trust at a financial institution could be a comfortable starting point. At the very least, that person should be able to explain the boundaries for minimum investment, fees, automatic contributions and investment options.
The slam-dunk retirement savings option is a 401(k) investment in which your company matches a certain percentage of your contributions. This is free money that should never be passed up. For example, if your company matches contributions up to three percent, you put in $3, the company puts in $3 and now you have $6 to invest. That’s a 50 percent return before you even choose a stock, bond or mutual fund.
Another option is to start a traditional IRA account (taxed when you cash it in at retirement) or Roth IRA (taxed when you buy it, no taxes if you cash it in at retirement). These are available from the investment brokerage houses, some banks and credit unions, or you can do it yourself online. The benefits of an IRA account are that interest, dividends and capital gains are not subject to tax while they remain in the account but are taxed upon withdrawal, usually at a lower tax rate.
Either way, there are going to be fees involved. Investors should be careful to know how much they’re paying. In some cases, the fees can eat up 30 to 40 percent of your gains. Read the fine print carefully.
The important thing is to get started. Retirement savings are not nearly as dependent on the broker you use, the stocks or mutual funds you select or how much money you invest as they are the day you started.
Start today and leave the garage, garden and bedroom for tomorrow.
Bill Fay is a writer for Debt.org, focused mainly on news stories about the spending habits of families and government. He spent 21 years in the newspaper business and eight more in television and radio, dealing with college and professional sports, then seven forgettable years writing speeches and marketing materials for a government agency.