Many investors are curious as to when they should begin to invest for their retirement. You will often hear people saying that you should start as early as possible, but what does that mean and how will that help? I wanted to take the opportunity to explain when you should begin saving, if you can, and what the effects can be if you do not.
We would recommend that you start saving for your retirement as soon as you have an income. Income does not necessarily mean a full time job. You could be receiving income as early as you are able to get your working papers. Starting this early will help instill a number of great values in our kids: it will expose our children to the fact that they need to plan for their future, the benefits of investing, tax deferred or tax free growth, and a discipline to live below their incomes. These are all great life lessons that some learn too late.
In order to outline this, let’s look at a real life example. Let’s assume that you have two children; Jane and John. Jane will begin to save at the age of 25, and John will begin at the age of 35. Jane and John will each begin to contribute $5500 per year from their beginning age until the age of 70 and invest it in a way that will compound at an annual rate of 6%. So what would Jane and John have accumulated by the age of 70? Jane’s account would be over $1,200,000 and John’s account would be just shy of $650,000.
This large difference is predominately due to John’s late start. He was affected by the fact that he was not able to contribute as much money and therefore lost the benefit of the extra 10 years of compounding. Both these concepts significantly impacted his long term balance. Jane would have contributed $247,500 over the 45 years she invested, and John invested $192,500 (a $55,000 difference). The key here is that starting early really benefitted Jane and will benefit you too.
Keep in mind that our example does not account for fees, taxes or inflation. I would also like to point out that the likelihood of receiving a 6% return every year is somewhat unlikely and it is more likely that you would have a different rate of return each year.
As you, your children, or grandchildren begin to work (even on a part time basis), be sure to have the conversation about having them “pay” themselves first and begin to think about their future. Setting up a Roth IRA will really benefit them if they are younger and in a lower tax bracket.
In order to illustrate that I practice what I preach, I would like to share a personal example with you: my 14 year old son works for me during the summer months in order to have spending money for the summer and school year. We sat down and discussed what he would be earning and devised a plan that would provide him with the spending money he wanted and funded a Roth IRA as well. Think about how your financial position may be different if you began saving at the age of 14. Not only has this put him in a position to be ahead when planning for retirement, but it has taught him the value of saving and how to manage money. We discussed how to invest the money and he has the ability to monitor his account and see how it is performing. We need to get ourselves, our kids and grandkids retirement ready and this will surely help.
We are here to help you instill these concepts within your own family. Feel free to contact us, Mitlin Financial, at (844) 4-MITLIN x12 if you or someone in your family needs assistance getting started saving today.
This article represents the opinion of Mitlin Financial Inc. It should not be construed as providing investment, legal and/or tax advice.