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# When to Start Saving by Judith B. Harrington and Stanley J. Steinberg, C.F.P.

There is an old adage that says “there is no time like the present.” This saying is especially true when you are considering when to begin saving for retirement. The single biggest factor in growing wealth is time. The longer your money is invested and has time to compound, the more money you will eventually have. Many young people are so busy getting through the early stages of their adult lives, finishing their education, establishing a career, and perhaps purchasing a home, that the lowest item on their to-do list might be saving for retirement. It is true that it is never too late to start putting money aside, but there is definitely a huge advantage to beginning earlier rather than later.

## Compounding

You may have heard the term “compounding.” It simply means that as your money earns interest, you earn more interest on the interest. It's a beautiful thing. Over time the compounding effect can be startling. The U.S. Department of Labor provides an example of what would happen to an initial investment of \$1,000 earning various rates over time. Look at the following table and you will see that even at the lowest interest rate of 4 percent per year, the initial investment will triple in thirty years, or potentially grow over 1,700 percent with a 10 percent rate of return.

## \$1,000 Invested

 Years 4% 6% 8% 10% 10 \$1,481 \$1,791 \$2,159 \$2,594 20 \$2,191 \$3,207 \$4,661 \$6,728 30 \$3,243 \$5,743 \$10,063 \$17,449

If you put that \$1,000 away at age fifty-five and were earning 8 percent, you'd have \$2,159 at age sixty-five. If you had invested that same \$1,000 at thirty-five and earned 8 percent, you'd have a tidy \$10,063 waiting for you on your sixty-fifth birthday. The conclusion to draw from studying this table is that you would need to put aside three times the amount of money each month for every ten years you delay to meet your savings goal. Having your money grow while you are asleep is a powerful incentive to save. All you have to do is keep feeding it while keeping it off limits. The numbers can be even more impressive if you start really young.

Again, with the help of the number crunchers at the Department of Labor, if you were to save \$1,000 a year from age twenty to thirty (a total of eleven years) and then not touch it again until you retired at age sixty-five, you would reap a nest egg of \$168,514 (assuming 7 percent annual growth). Let's say your brother, who was never quite as smart as you anyway, decided to start putting aside his \$1,000 each year beginning at age thirty. If he put the \$1,000 aside every year for thirty-five years, with the same 7 percent annual return, he would still only come up with \$147,913 at his retirement at sixty-five. Let's think about that. You will have invested a total of \$11,000, beginning at age twenty, and realize \$168,514. He will have invested \$35,000, beginning at age thirty, and realize \$147,913. When you do the math, you see that you have gained \$157,514 to his \$112,913.

## Advantages of Youth

Besides the compelling power of compounding to induce you to start your retirement savings as soon as possible, there are other factors that are on the side of youth:

• Starting early helps to set a lifetime habit of saving and living within your means.

• Even small savings can grow large with time.

• Starting early allows for aggressive investing. Time will smooth out peaks and valleys of investment cycles.

Keep these benefits in mind if you are putting off beginning your retirement savings plan until later in life, when you think you will be more financially stable and it will be easier to save. While it might be a struggle to put money away when you are young and in a lower-paying job, any amount you set aside for saving will multiply and contribute a significant amount to your retirement fund.

Younger people today will be responsible for more of their retirement than their parents. You will need extra time to accumulate the resources to enable you to live well later. With longer life expectancies, company pensions disappearing, and the uncertain future of social security, greater focus on personal savings is necessary more than for any generation in the past.

## Beginning Toward the End

If circumstances have you viewing your impending retirement as a not-so-gentle push off a cliff, do not panic. It is never too late to get yourself organized. You will need to make choices, however, to make sure you have a soft landing. The main point is to get going with a savings and investment strategy that is appropriate for where you are in life now.

Here are some tips for the procrastinators:

• Pull the largest possible portion of your income off the top for savings. Try for more than 20 percent if you can swing it.

• Eliminate every extraneous expense possible and direct those savings to your retirement.

• Increase your income. Find a second job or income-producing activity.

• Keeping risk in mind, review your investments to see if you can get higher returns from different strategies.

• Lower your standards for how you expect to live when you retire.

• Plan to keep working and defer collecting social security until later, because you will receive larger payouts that way.

• Downsize your home expenses — consider moving or taking in tenants.

• Sell assets that do not produce income, such as an art collection or undeveloped land, and reinvest in income-producing instruments.

Time is the great accelerator. Saving steadily from a young age can generate powerful resources. Living longer in retirement can thin out those resources, so it's best to start young.

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#### THE EVERYTHING RETIREMENT PLANNING BOOK

By Judith B. Harrington and Stanley J. Steinberg, C.F.P.

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