I know most of my readers are over age 50, so this message is more for you to pass along to your adult children or perhaps to your grandchildren. This is especially so for those of us who have had family members just graduate from college and are beginning a very important next stage in their adult life.
The message in a nutshell is: Begin to SAVE EARLY!
They say that compound interest is the eighth wonder of the world (or something like that). Here is how starting to save early can make a huge difference. For example, saving $6,000 a year starting at age 25 will result in more than $1.25 million at age 65, for a total outlay of $240,000 (assuming a 7% return).
If instead, saving is delayed until age 35, the same $1.25 million goal would take saving $13,000 a year, for a total outlay of $390,000. Or waiting until age 45, it would take $28,500 a year, (for a total outlay of about a $570,000, to reach the same amount of savings at age 65.
In other words, to reach the same exact savings goal at retirement, recent graduates will have to double contributions to their 401(k)s if they wait until age 35 compared to getting started at age 25. The same goal requires four times the savings when starting at 45, and eight times the annual savings at age 55.
Of course, $1.25 million won’t mean much in 40 years due to inflation so they’ll need to save much more than that to become financially independent, but the principles of starting meaningful savings as soon as possible holds true. Let time and compounding work.
I realize that there are many new financial obligations vying for a recent grad’s newfound income. Besides starting a solid savings plan, they’ll need to create an emergency fund, maybe start paying off student loans and setting up a new household. Balancing all of these competing financial priorities can be challenging. It certainly may mean making some sacrifices in the near term, so they can build their wealth for long-term financial well-being.
I’m sure that you’ll agree that graduation means taking on adult responsibilities, which include saving enough to ensure one’s own financial independence. By taking these simple and responsible steps — starting to save and taking full advantage of their employer’s 401(k) match while they’re young enough to benefit from the long-term power of compound growth — will make that feasible.
all the best… Mark