Early and Small Wins Over Later and Bigger

Carla Fried

It makes me a bit nuts how talking heads and money experts insist on making investing sound so hard. It really isn’t. Sure, there are some key rules of the road to follow –diversify, pay attention to costs-but there’s also one incredibly simple truism that can lead you to riches: start saving early rather than later.

That’s it. No caveats. No arcane formulas or theories. The sooner you start to save, the more time your money will have to grow, and most importantly, the less you need to fork over to generate that future pot of gold you want.


Retirement Made Easier


I will make my case using a good old IRA, as saving for retirement is often the most challenging savings goal for many of us.


In 2011 if you’re under 50 years old you can invest a maximum of $5,000. That works out to a monthly $416 and change you can have automatically deposited from a bank account into a Roth account.


So let’s conjure up a scenario where at age 25 yousock away $416 a month and keep it up for the next 20 years. Assuming a 6 percent annualized rate of return you would have about $193,000. (Why 6 percent? Well, it’s just my sort-of-conservative guesstimate for a long-term diversified portfolio. By all means, feel free to plug in a different rate of return.)


Okay, so now you’re 45 with $193,000. Of course, the best move is to keep saving, but just for argument’s sake let’s say you get distracted by other financial concerns such as saving for your kids’ college, or helping your aging parents. So you stop your annual contributions and just leave your $193,000 balance to grow for another 25 years. At age 70-assuming the same 6 percent annualized return-your Roth IRA could be worth more than $825,000.

Not bad, eh? For 20 years, from age 25-45 you invested a total of $100,000. That’s all your skin in the game. And by age 70 it might be worth a tidy $825,000 or so.


The Cost of Playing Catch-Up


But let’s say you didn’t get focused on retirement saving until age 45. You’ve literally got nothing saved , but now you are ready to dive in with gusto. And you’re determined to end up with the same $825,000 by age 70. Sticking with our assumed 6 percent annualized rate of return, how much might you need to sock away each month if you start at age 45, to end up with $825,000?

About $1,180 a month. And that’s not a typo.


That is, you would need to save $1,180 a month for 25 years (from age 45 to age 70) to have a shot at an $825,000 balance. During that 25-year stretch you would have plunked down $354,000 of your own savings to generate that $825,000. That’s more than triple what you would have had to fork over ($100,000) had you started at age 25, and saved for just 20 years.


I know it’s never easy to find the money today to save for a long-term goal. But scouring your finances so you can find more to put away today is ultimately going to be the least painful way to reach that future goal.