The question of when to start investing for retirement seems easy, but few people understand the importance of the answer. In a previous post I name the five most important factors of increasing portfolio value. The most important factor is years of compound growth.
The Importance of Time
The powerful concept that makes time the most important factor in determining the value of your portfolio is exponential growth. The ability to estimate growth with double time and the rule of 72 will further illustrate the importance of time. Every investor should understand these important investment basics.
Investing For Retirement
Financial experts estimate you will need 70 – 90% of your current income to maintain your current standard of living when you stop working. The three common sources of retirement income are social security, employer sponsored retirement plans, and personal savings and investments.
Social Security benefits typically provide only a small percentage of needed retirement income. In addition, benefits will almost certainly be less in the future than today. Therefore, your retirement plans and investments will need to provide the majority of your retirement needs.
When to Start Investing
The earlier you begin to plan, the greater your chances of having choices and a quality retirement. Because of the power of compounding, the investments made in your early years should be worth many times over the value of your investments made closer to retirement.
If you need $40,000 per year in retirement income at age 65 (in addition to Social Security benefits) you will need to save approximately 1 million for retirement. Here is the amount you will need to invest each month to save 1 million, assuming you earn an 8% return on your investments.
Age 25: $285/month
Age 35: $667/month
Age 45: $1687/month
This illustrates the importance of time. You need to let the “magic of compounding” work over time. By living a little more frugally in your early years you can save enough money to have a comfortable retirement. By waiting until middle age the task becomes much harder.
The question when to start investing for retirement?, is easy. No matter what age you are; TODAY is the day. Now you understand the importance of time and why it is crucial to start early.
Related Reading: Online Investing For Dummies – Get Started Here