For those aiming for a traditional retirement age of 65, starting early is their best friend. If you ask people how much they need to retire most will answer "$1 million". Now I'm not saying that yes you do or do not need that much, it really depends on your expense level and how you're invested. But for the sake of making the calculations easier we'll assume that anyone can retire at 65 if they save up $1 million.
Some other assumptions we'll make are that this is the typical American family which according to 2009 US Census Bureau statistics, brought in $60,088 dollars. We'll also assume that the inflation is 0% and that their income doesn't change throughout the entire period. A constant 7% annual return is achieved through investing in broad market index funds.
Let's look at 3 different families. We'll have one that both members started investing for retirement early and continued on their way after finding each other. Family two starts a little later thanks to going to college and having to delay saving to focus on education and they had a part time job that covered their expenses with a little bit of play money. So family two starts at age 28. The third family starts very late, they never really thought of saving for retirement and never made it a priority. Before they knew it life had gone by and now they're 38 and really behind the eight-ball.
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Thanks to compound interest and the all important time factor, family one had to invest only $2,645.51 per year to reach $1,000,000 since they started so early at 18. Family two still is in pretty good shape needing to invest $5,415.94 annually to reach that $1 million goal. Family three however needs to save $11,581.24 each year.
By starting 10 years later than family one, family two had to invest 2.05 times more than family one each year. Family three is even worse off since they have to invest 4.38 times as much each year as family one. Even on a total amount invested basis, family one comes out way ahead with only $126,984 invested. Family two had to invest $205,805 or 1.62 times as much as family one. And family three is bringing up the rear again. Since they had 20 less years to invest and compound their returns they had to in $324,275 to reach $1 million by 65. That's 2.55 times the amount family one had to invest.
How do they fair when compared to their gross income? Family one has to save a pretty easily attainable 4.40% of their gross income each year. Family two has to save 9.01% of their gross income each year and family three's rate jumps up to 19.27%. Family one and two only need to save fairly small chunks of their gross income each year, but I find it hard to believe that most families that don't start saving until they're 38 will be able to quickly adjust their spending habits to where they are now saving almost 20% of their gross income. It'll at least take a few years because old habits are hard to break and those are pretty significant changes.
Starting early in saving and investing is one of the best things that you can do. Luckily I started somewhat early around the 24/25 mark but had I seen this when I was 18 I would have started even earlier.