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Q: Why should I start saving for retirement when I won't retire for at least 40 years? I can use that money today!
When you start saving at a young age, you get to enjoy the full power of compound interest. The power of compounding means that you can save smaller amounts when you are young, yet still end up with more at retirement than the person who starts saving larger amounts at an older age. Here's an example of how compounding works:
At age 19, James begins putting $2,000 per year into a retirement plan that earns a return of 12 percent per year. He does this for eight years, or until age 26. Then he stops contributing altogether and never adds another penny. At age 65, through the power of compounding, he has $2,289,000. John begins saving $2,000 per year at age 27 in the same type of account earning the same 12 percent rate of return. He contributes $2,000 per year for the next 38 years, until age 65. At age 65, John has amassed only $1,532,000, or almost $800,000 less than James.
When you wait to start saving, you have to save much larger amounts to make up what was lost by not starting young.
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