As you probably know, 2016 is a Leap Year — and Feb. 29 is Leap Day. This oddity in the calendar may get you thinking about the nature of time. And, as an investor, you should certainly be aware of the importance of putting time on your side.
When saving and investing for a long-term goal, such as a comfortable retirement, you might be surprised at how big a difference just a few years can make to your potential accumulation. For illustrative purposes, let’s look at three scenarios. (Keep in mind, though, that these figures don’t represent an actual investment.)
Suppose, for example, that you decide to get serious about your retirement savings when you’re 40, with the goal of retiring at 65. If you put $200 per month, or $2,400 per year, into the investments within a tax-deferred vehicle, such as a traditional IRA, and those investments earn a hypothetical 7% a year, you will have accumulated slightly over $162,000 after 25 years. But if you had started investing just five years earlier, when you were 35, and you put the same $2,400 into the same investments earning the same hypothetical 7% return, you’d end up with more than $242,000 after 30 years. And if you had started five years earlier than that, when you were 30, again contributing the same amount and earning the same return, you’d have amassed almost $355,000 by the time you reach 65. (You’ll be taxed on the withdrawals; also, withdrawals prior to age 59½ may be subject to a 10% IRS penalty. Assuming you don’t start taking withdrawals until you’re retired, you might be in a lower tax bracket.)
Of course, these projected amounts could grow even bigger if you started saving earlier, or if you invest more money each year. But you get the general idea: The earlier you start investing for your future, the better the outcome is likely to be. Plus, by starting early, you can put in relatively modest amounts — but the longer you wait, the bigger your annual contributions must be to enable you to save the amount of money you’ll need to help you enjoy a comfortable retirement lifestyle.
However, knowing that you should start investing early, and actually doing it, are two different matters. How can you consistently put away money for retirement?
Possibly the most important step you can take is to pay yourself first. If you wait until you pay your bills and take care of your other expenses before investing, you may never get around to it. Instead, set up automatic monthly transfers from your checking or savings account into an investment.
If you have access to a 401(k) or other employer-sponsored retirement plan, you’ve already got an automatic investment mechanism in place, because your employer takes part of your paycheck and places it in the investments you’ve chosen. Needless to say, you should take full advantage of your plan, contributing at least enough to earn your employer’s match, if one is offered, and increasing your contributions whenever you get a raise.
This article was written by Edward Jones for use by your local Edward Jones Financial Adviser. Douglas J. Drost CFP Financial Adviser for Edward Jones, 2262 Reno Highway.