Go Big, Then Stop (Part 2)
How Much Will Delaying Cost You?
Let’s say that you want to enjoy the first decade of your career and you don’t want to worry about savings. That’s completely fine and reasonable. But, how much will this cost you in the long run?
Assuming you can earn a 7% return (and want to retire on the same schedule), then you will have to save approximately double (100% more) of what you would have saved initially. So, if you decide to take $5,000 a year in your 20s and use it on vacations instead of savings, be prepared to save $10,000 a year in your 30s to make up for it (all else equal). And what if you delay more? Then the required savings to stay on track goes up exponentially.
By the time you delay your savings for 20 years, you need to save 400% more (five times more) than if you had never delayed your savings at all.
Here is a chart that we have put together here at Worthwhile Wealth Council that really gives our clients a visual representation of the cost of waiting to invest in retirement.
The left side of the chart represents a person contributing $6,000 to a 401K at the age of 25 until the age of 34 and then stopping. This individual will have almost 700k to retire on at the age of 60 with a total investment of only $60,000. That is the magic of compounding interest and why starting early is so key!
Conversely the right side of the chart represents an individual that started saving for retirement at the age of 34. They contribute the same $6,000 per year as other participant but pay in for 25 years instead of the 10. Their total contributions add up to $156,000 and that individual will retire with a little over $500K.
Wow! It is the exponential cost of delayed savings that can hurt in the long run.
**Disclaimer: This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.