When should I start saving for retirement? The simple answer, now!
The power of long periods of compounding is huge. Therefore you should start saving for retirement as early as you possibly can. But don’t take my word for it, let’s look at the math.
Take two people, Jane and John. Both are 25, fresh out of college, and have their first job. Jane is prudent and decides to start saving for retirement right away at $3000 per year. However, for some reason, she decides to stop saving at age 35. Nevertheless she has $472,000 by age 65 even though she only contributed $30,000 to her retirement, assuming an 8% annual return.
John, the procrastinator, is more concerned about his spending money now. He decides to wait until age 35 to start saving $3000 per year for retirement, but does so all the way to age 65. He contributes a total of $90,000 but only has $367,000 at age 65.
What accounts for the $105,000 difference? The benefits of compounding 8% year after year after year for a longer period of time. Had Jane continued contributing, simply add the two together and she would have $839,000.