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It can't be emphasized enough. The earlier you start to save, the more you'll end up with. That's why we're giving the last word to compounding return.
This is a story about two sisters, Mary and Shelly. Mary is the frugal one, while Shelly is a bit of a party girl.
At 25, Mary begins to save for retirement. She contributes $2,000 per year to a
plan returning 10% annually. She is a dedicated saver and makes her contribution
every year. After going on at this rate for eight years, however, Mary decides
she just can't get by without that $2,000 per year. Rather than putting that
money toward retirement, she begins to invest it for other goals such as her children's
education. The result is that from age 33 to age 65, Mary doesn't put another
penny into her retirement plan. Her total 401(k) contribution is $16,000.
Shelly, on the other hand, doesn't think much about saving in her youth. It's not
until she is 33, the age when Mary stopped saving, that she realizes the need to
start saving. Having gotten the inspiration later in life, Shelly turns out to be
an even more dedicated saver than her sister, and carefully puts away $2,000 per year
in a 401(k) plan for the rest of her working life. The result is that for 32
years, she saves regularly. Shelly's investment plan also returns 10% per year. When she
retires at 65, her total contribution is $64,000.
However, because she started earlier, Mary has gotten a much greater return on a
much smaller investment. Her total retirement nest egg comes to $531,188. Shelly,
who has contributed four times as much as her sister, ends up with a smaller nest
egg -- only $442,496.
This parable is a strong example of the power of compounding. Almost everything
that the two sisters have at retirement is due to compounding. In fact, after only
seven years, the amount that they earn each year from compounding is greater than
the amount they are contributing. Both sisters have benefited greatly from compounding
return, but Mary benefited more because she started earlier.
And by the way, if you didn't start at 25, or even 40, don't despair. You are
still better off contributing to a retirement plan than not doing so. But whatever your current
age, the time to start is now!