The big topic for most young people considering retirement is about timing – when is the right time to start saving for retirement? Do I have to start now? If I’m not making much money now, would it make sense for me to wait to save for retirement until I have a higher income?
These are important questions and the answers will vary based on individual circumstances. However, a few principles are helpful to keep in mind:
- The longer your money has to grow, the more that money is expected to grow
- Catching up later in life is hard to do
By starting to save for retirement early, your money will have longer to grow and you will have more available to you in retirement. If you start saving later in life, you will need to save more money each year in order to have the same amount of money.
Let’s assume that your investments will grow at 7% per year. The amount of money you will have in retirement is a function of how much you invested and how long that money had to grow.
- If you start investing $100 per month every month ($1,200 per year) starting from age 18 and never change your contribution or make withdrawals, you will have over $450,000 at age 65.
- If you wait until age 25 to start saving, you will need to invest $165 per month ($1,980 per year) to reach that same amount by age 65.
- If you wait until age 30 to start saving, you will need to invest $237 per month ($2,844 per year) to reach that same amount by age 65.
- If you wait until age 40 to start saving, you will need to invest $514 per month ($6,168 per year) to reach that same amount by age 65.
- If you wait until age 60 to start saving, you will need to invest $4,939 per month ($59,268 per year) to reach that same amount by age 65
| Balance at Age 65 | $453,599 |
| Monthly Contribution Starting at Age 18 | $100 |
| Monthly Contribution Starting at Age 25 | $165 |
| Monthly Contribution Starting at Age 30 | $237 |
| Monthly Contribution Starting at Age 35 | $346 |
| Monthly Contribution Starting at Age 40 | $514 |
| Monthly Contribution Starting at Age 45 | $787 |
| Monthly Contribution Starting at Age 50 | $1,267 |
| Monthly Contribution Starting at Age 55 | $2,238 |
| Monthly Contribution Starting at Age 60 | $4,939 |
This shows a dramatic benefit to saving while young. Another way of thinking about it is considering the multiplier on your money if you invest at different ages. The money you invest at a younger age will compound more than the money you invest at a later age.
Below are the implied multipliers on every dollar invested, assuming a 7% annual return and withdrawal at age 65.
| Multiplier on investment by age | |
| Money invested at age 18 | 24.05 |
| Money invested at age 25 | 14.97 |
| Money invested at age 30 | 10.68 |
| Money invested at age 35 | 7.61 |
| Money invested at age 40 | 5.43 |
| Money invested at age 45 | 3.87 |
| Money invested at age 50 | 2.76 |
| Money invested at age 55 | 1.97 |
| Money invested at age 60 | 1.40 |
For example, if you invested $100 at age 18 and always reinvested the interest, that initial investment would be worth $2,400 at age 65. Between age 18 and 30, the multiplier drops from 24x to ~11x. By age 40, the multiplier is only ~5x. The implication is simple – the high multiplier years at the beginning of your career can put you in a great position if you plan ahead and save for retirement.t
