After years of living on part-time pay and Grandma’s birthday money, you’ve finally found your first source of steady income. The newfound ability to spend can easily overshadow the importance of savings, especially retirement savings.
But, the willpower to fight against this urge will yield great rewards because the earlier you start saving, the faster your money will grow. You can thank the mathematical phenomenon of compounding, which exhibits the exponential growth of money.
Let’s say you plan to retire at age 65 and managed to scrape together $25,000 by the age of 25. If you don’t touch that money and it grows an average 6 percent annually, you’ll have $274,000 when you retire. If you started with $25,000 at age 30, at the same rate of growth, you’d have $203,000 when you stop working. Have $25,000 at age 35? Retire with just $150,000.
(Use our savings calculator to play around with different savings scenarios.)
So you can see that time is a major advantage when it comes to saving. Those who start saving later will end up with significantly less when they retire. In fact, many seniors cannot retire comfortably and continue to work because they didn’t save enough in their younger years.
But, there’s another compelling reason to begin building retirement savings immediately: tax advantages.
When you contribute to a retirement account, such as an individual retirement account (IRA) or a 401(k) plan, you gain tax advantages that are not available with a regular savings account or brokerage account. Since the IRS places a limit on how much you can contribute to certain retirement accounts per year, you’ll lose these tax advantages if don’t contribute for any particular year.