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By Pam Leibfried
This is the first in a five-part series on saving for retirement at any age. Check in next Tuesday for information on retirement savings in your 30s.
The most important thing about saving for retirement in your 20s is that you DO IT and do it NOW! Although it’s easy to dismiss the need for retirement savings when you are so young and retirement seems so far off, if you start in your 20s, you’ll have more years during which your retirement savings can grow via the compounding of your earnings.
Alliant employees teach financial literacy classes using the Banking on Our Future program developed by Operation HOPE. The lesson on compounding includes a table showing the results of a $2,000 a year investment after 10 years, 20 years, 30 years, 40 years and 50 years. At an average annual return of 7% (which is about the historical average for investment funds), someone who invested only $2000 each year starting at age 20 would have $869,972 in retirement savings by age 70. And keep this key fact in mind: 50 years of contributions at $2,000 per year means that only $100,000 of retirement savings were put into that $869,972 account. An astounding 89.6% of the total amount accumulated is due to the compounded earnings.
But the most sobering fact that a 20-something should consider is that if the same $2,000 annual contribution were started at age 30 instead of age 20, the account’s balance would be cut in half! The extra 10 years of contributions and compounded earning give you double the resources at retirement.
Although the table above shows a hypothetical investment – and anyone who was invested in the stock market in 2008 or 2009 knows that there is no guarantee that stock investments won’t lose money – the long-term impact of compounded earnings and the potential benefits of starting earlier rather than later couldn’t be clearer. The example above is not representative of any specific investment. Your results may vary.
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