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The Cost of Waiting One Year Print
Tuesday, 23rd May 2006 (by J.D.)This article is about Planning, Retirement, Tools
AllFinancialMatters has posted a couple of shocking charts illustrating the cost of waiting to invest in your retirement. I keep closing the page, but then opening it again to look at them.
After messing around with the retirement savings calculator I built, I started thinking about the cost of waiting just one year to start saving for retirement. The impact is huge! Take a look at the chart below:
I assumed the following:
A person starts saving $2,000 per year at age 22. The account grows at 10% per year. At age 65, they could have $1,804,801.
This chart is especially alarming since I just turned 37 two months ago. I want to find a calculator that tells me how much I should have saved by this time, and then compare that with the amount I actually have.
If this won’t make you start putting aside money today, then nothing will.
May 23rd, 2006 at 8:44 am
This tale is a powerful illustration of how powerful a force compounding is. But the flip side of the story is that compounding can be just as powerful against you (in the form of interest for debt) as it is for you (in the form of investment returns).
Here’s a little exercise for those of you who are spreadsheet-inclined. I got this from a book called The Random Walk Guide to Investing, by Burton Malkiel. It’s a book I do recommend, and I’ll eventually talk about that in the forum. Anyway, here’s the exercise:
William and James are twin brothers who are 65 years old. 45 years ago (at the end of the year when he reached 20), William started an IRA and put $2K in the account at the end of each year. After 20 years of contributions, William stopped making new deposits but left the accumulated contributions in the IRA fund. The fund produced returns of 10% per year tax-free. James started his own IRA when he reached the age of 40 (just after William quit) and contributed $2K per year for 25 years, making his last contribution today. James invested 25% more money in total than William. James also earned 10% on his investments tax-free. What are the values of William’s and James’s IRA funds today?
May 23rd, 2006 at 1:51 pm
[...] In an earlier entry about the cost of waiting one year to begin investing for retirement, I posted a chart from AllFinancialMatters that demonstrated the power of compound interest. Vintek posted a math exercise related to the subject. I got this from a book called The Random Walk Guide to Investing by Burton Malkiel. It’s a book I recommend, and I’ll eventually talk about it in the forum. Here’s the exercise: [...]