There’s a simple formula for getting rich. All somebody needs to do is save a large percentage of their income, invest it for the long term, and they’ll undoubtedly end up wealthy.
Executing is another matter, of course. We all have bills. Recent university grads might have it the worst of all, having to juggle student loans, saving for a down payment, and dealing with not getting paid as much as they’d like.
It’s easy for them to avoid retirement planning completely amid other seemingly conflicting goals.
But people who put off retirement planning to so at their peril. Compound interest ensures saving today will have a far greater impact than in the future.
Say we have two twins who are both 25 and anticipate retiring at 65. One contributes $20,000 per year towards retirement from age 25 to 30 and then stops. The other starts at age 30 and contributes to age 60, putting away $10,000 per year. Each earns 8% and pays no tax until earnings are withdrawn.
The first twin ends up with a nest egg worth $1.87 million after putting up just $100,000 of their own money. The second twin ends up with $1.32 million despite spending $300,000 in seed capital.
By starting early, millennials can ensure they have enough for retirement. It’s possible to start later, but the journey becomes much tougher.
