3min
Sep 17, 2024
When you're young, your ability to earn an income is your biggest asset. At retirement, this ability to earn diminishes or falls away entirely, meaning you need to have a financial buffer for when you age. So why get an early start? The earlier you start, the less you have to contribute per month.
But knowing when to start is only half the journey. You also need to know how much you'll need According to the Chief Investment Office and Bank of America Retirement & Personal Wealth Solutions, you should already save 0.1 times your annual income between the ages of 18 and 25.
Start Early to Maximize Results
There are several reasons why you should save as early as possible and for as long as possible.
Market Volatility
The longer you invest for, the better able your investment will tolerate market volatility. By continuing to invest during the downtowns, you're also able to buy into the markets at a lower price. See it as shopping for bargain investments.
Hedging Against Inflation
A balanced portfolio with funds across all asset classes hedges against inflation, which means that the growth has the potential to outpace inflation. This is rarely true for regular savings.
Compound Interest
The compounding effect of interest is a financial marvel. It allows you to earn interest multiple times over throughout the life of the investment. If you invest an amount, you earn interest depending on the frequency of the interest distribution. For instance, if you earn interest annually, you'll earn interest on your initial deposit for the first year. For the second year, you'll earn interest on the initial investment plus the interest you earned in year one. This continues for the life of the investment.
This graph from Investopedia shows that an investment of $10,000 with an interest rate of 5% that compounds annually will accrue more than $30,000 in compounded interest over a period of 30 years.
Source: Investopedia
I've Been Working for Years Already, Is It Too Late To Start Investing?
Very few people have decent retirement savings in their twenties. For most, the reality of retirement really only kicks in when you're in your thirties or even forties. According to Pricewaterhouse Coopers, 42% of those between the ages of 18 and 29 don't have any retirement savings.
You're not too late to start, but if you want to build a substantial retirement egg, you may need to double or even triple your savings.
An example of the power of saving early can be found on Investopedia, where they use twins who started saving for retirement at different ages.
Twin A starts saving $100 per month at age 20 with an annual compounding interest rate of 4%. After 40 years, twin A only invested $54,100, but their earnings are $151,550.
Twin B only starts saving at age 50 with an initial investment of $5,000 and monthly payments of $500. The annual interest rate is 4% and compounds annually. While twin B has a principal investment of $95,000, their earnings are only $132,147.
While it's never too late to start, starting earlier makes it a lot easier to build up a decent investment portfolio.
How to Start Investing
When you're ready to invest, these simple steps should kick you off:
Step 1: Your Budget
Allocate a portion of your budget to retirement savings. See this as you paying your future self first. When allocating money to investments, be sure that you're happy to part with those funds for the long term. This means you should have separate short-term savings already set up for your short-term financial needs.
Step 2: Your Risk
Deciding on the types of investments you choose will depend on your risk appetite. If you're looking at high-risk investments, you should invest for the long term. Short-term, high-risk investments could leave you out of pocket as there's not enough time to weather market fluctuations.
Step 3: Speak to a Professional
A financial advisor or investment specialist should be able to guide you through your options after working through your budget and conducting a needs analysis.
Step 4: Sign Up
Some financial institutions offer the entire process online. This also means that you're able to keep an eye on your investments through their website or a mobile app.
Save With Savvly
When it comes to retirement savings, there's no time quite like the present to get started. While it helps to start early, it's still possible to put away a decent amount of money before retirement even when starting later on in life.
Reach out to Savvly to learn why we created the first market-driven private pension and how it could help you thrive in retirment.
