Retirement Plan Investing
It can be difficult to convince workers in their twenties and thirties they need
to start saving for retirement. Unfortunately, the later one begins to save for
retirement, the more one has to save and the riskier they must invest to meet their
retirement needs. The main force behind this is the way interest is earned on principal
and past interest payments, otherwise known as compound interest.
The best way to show the effects that this compounding has over time is with an
example. Assume both investors below earn an 8% annual rate of return on their investments
and are reinvesting their gains. The early investor begins saving at age 25, and
the late investor does not begin until 45. The chart below shows the total amount
of savings needed to reach $1,000,000 at retirement, assuming the 8% annual return:
As the chart clearly depicts, the later one begins saving for
retirement, the more one has to save to reach the same investment goals as someone
that begins saving much earlier. The early investor saves about $4,000 annually
while the late investor is forced to save approximately $22,000 a year until age
65, which adds up to close to $300,000 over the course of their working lives.