Time—Friend or Foe?

You will never regret accumulating retirement savings over the decades of your life, actualizing the power of compounding interest, and allowing time to work as your greatest ally.

The sooner you start saving, the less you’ll have to put away each month to accumulate the needed funds for retirement. For example, say as a 25-year-old you open an IRA and save $100 a month ($1,200 per year). The IRA earns an average of 6% a year. After 40 years — when you’re 65 and ready to retire — your account balance could grow to over $185,000.

But let’s say instead, you put off saving until you are 45. At the same rate of saving in an IRA with the same returns, by the time you’re 65, your IRA balance would be just about $44,000. Starting when you’re 45, you’d have to contribute $420 a month until age 65 to save about $185,000.

At least that would be less painful than if you waited until you were 55. Then to match the end result, you’d have to save $1,175 per month. (These examples are provided for illustrative purposes only and are not intended to project the performance of a specific investment vehicle.)

One way people often try to compensate for getting a late start in saving is to shoot for a higher rate of return. Instead of settling for the 6% a year we used in the example, why not go for 10%? But there are two problems with that strategy. The first is investments don’t always provide consistent returns.

Second, to earn higher rates of return, you have to take on more risk. That’s fine when the big returns come in; but in the long run, big returns in some years are usually paid for with big losses in others.

Not everyone realizes time spent not saving can have a significant cost, and there are only so many ways to make up for it. The sooner you start putting more money aside, the better.