Compound Returns: 2X your Retirement Savings by Starting at 25 vs. 35

One of the biggest sentiments I encounter when chatting about retirement savings with others goes a little something like this,

Ahhh. I’m young – I’ve got plenty of time to save for retirement in my later years, when I’m making more money. Might as well live it up while I’m young!

To some extent, I get it. I really do. Health and youth are in finite, limited quantities and should be cherished (although 60 is the new 40, or something like that).

Unfortunately, when those later years come around, the savings don’t follow as promised by younger versions of ourselves. For starters, those who have made their identity over decades through spending have a rough time making the transition to an identity as a saver. The longer you’ve identified as a spender, the more difficult it is to break free – as with any addiction.

Secondly, the “making more” assumption is an important detail that often does not become reality. Almost 100% of lifetime earnings gains come in the first decade of your career:

For the median lifetime earnings group, average earnings growth from ages 35 to 55 is zero. Second, with the exception of those in the top 10% of the LE (lifetime earnings) distribution, all groups experience negative growth from ages 45 to 55.

So, there’s that depressing statistic.

Aside from all that, there is one extremely compelling reason above all else that illustrates why you should not hesitate to start saving – the power of compound returns. Here’s a chart from JP Morgan to help illustrate:

compound returns

Starting savings 10 years earlier (at age 25) can literally more than double your nest egg by age 65 versus starting at age 35 ($1.87M vs. $919K). In other words, 10 years sooner equates to 2X the savings. And that’s with a conservative annual earnings estimate of 6.5% and modest annual savings of $10K.

For longtime readers, this shouldn’t be news. The power of compound returns is crazy effective:

$1 saved in your twenties can be the equivalent of $10 saved in your fifties, if invested over time… Actually, $10.06 to be exact – at an average annual rate of return of 8% on your investments over 30 years. Even if you factor in 2% annual inflation, you’d have 556% of the buying power for every dollar you save today.

The millennial personal savings rate is -2%. You can talk about the virtues of youth excess all you want, but if you don’t save in your twenties, you’re screwing your future self. Work is a temporary opportunity, so save what you can while you can.

If you save early and often enough, you can hit your crossover point and financial independence early enough that you can have both savings and your youth to play with, for decades to come.

There is an increasing amount of research and evidence that has found that material possessions don’t lead to sustained happiness (on the flip side, financial security does).

Bottom line: using “youth” as an excuse to put off savings is a really poor excuse that doesn’t really help you now and can lead to catastrophe later on.

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