As a young professional, you’re faced with conflicting financial priorities as you start your career: budgeting to cover rent and living expenses, paying off student loans, and trying to save whatever’s left—for both fun and a rainy day. Retirement can seem so far away that it’s tempting to put off saving for it until you feel more established. However, this goes against a main tenet of investing: Time in the market matters more than how much you invest.
Consider this: Growing your retirement nest egg isn’t unlike growing a veggie garden. You plant small seeds, give them water and time in the sun, and by the end of the season you should have healthy plants that give you fresh produce. But if you start planting late, you can’t just water the seeds more frequently for them to grow enough—they need time to grow.
Time Is (Literally) Money
The power of compounding has a similar effect on your investments. Compound interest can help grow money faster because it’s the interest earned on your initial principal and any previously accumulated gains and interest. That’s why starting early, even with a smaller initial principal, can be far more beneficial than investing a larger amount later on.
For example, as FIGURE 1 shows, a 23-year old who starts by investing $2,500 for five years, then $5,000 for five years, and $10,000 for another five could be a millionaire by age 63. This early-starter would only need to contribute $87,500 over the course of 15 years to reach the million-dollar mark.
By contrast, FIGURE 2 shows a mid-career professional who saves $10,000 a year for 25 years, beginning at age 40. This investor would grow his or her wealth significantly, but would invest about 3x the principal of the early starter ($260,000 vs $87,500) and only hit the million-dollar mark at age 67.
An Investor Who Starts Early Could Grow $87,500 into $1 Million by Age 63
An Investor Who Begins at Age 40 Would Have to Invest 3x More ($260,000) to Reach $1 Million by 67
Figure 1 uses a $2,500 initial investment, and Figure 2 uses a $10,000 initial investment. Both scenarios use a hypothetical 8% return and do not take into account taxes, transaction costs, or market declines, and use a combination of IRA and company-sponsored 401(k) contributions. For illustrative purposes only. The illustration doesn’t represent any particular investment, nor does it account for inflation.
Not a Matter of Winning or Losing
It’s important to note that starting to invest early doesn’t guarantee success, and that starting late doesn’t mean you’ve failed. Both investors in these hypothetical scenarios reach the million-dollar mark, they just do so at different times and with different outlays. The main takeaway is that the amount you invest can be less important than when you start investing.
The amount you invest can be less important than when you start investing.
How long you stay invested is also an important factor. The scenarios in Figures 1 and 2 illustrate that starting early can give you a big leg up on your nest egg, even if you only invest for 15 years. But why stop there? Figure 3 shows how much more a young investor’s money could grow with continuous contributions (totaling $367,500) over the course of a career. Between an early start and steady contributions, investors who start young could be multimillionaires by retirement.
An Investor Who Starts Early and Invests $367,500 Throughout Career Could Be a Multimillionaire By Retirement
Scenario uses a hypothetical 8% return on a $2,500 initial investment ($2,500 for five years, $5,000 for the next five years, then $10,000 thereafter) and does not take into account taxes, transaction costs, or market declines. Investor in this example is using a combination of IRA and company-sponsored 401(k) contributions. For illustrative purposes only. The illustration doesn’t represent any particular investment, nor does it account for inflation.
If $2,500 seems like a lot to invest on your salary, keep in mind that it doesn’t have to all come out of your pocket. Many companies provide a 401(k) match to help employees save. Contributing enough to meet the full amount of your company’s match is a smart way to maximize your savings, especially when you may not feel you can afford to invest very much.
With the power of compounding, less money can be significantly more in the long run.
Saving for retirement is a long-term journey, and even a small contribution can add up over time. This is why as a young investor, you shouldn’t sell yourself short: With the power of compounding, less can be significantly more in the long run.
A financial professional can help you juggle all your financial priorities and get your retirement savings started.
Important Risks: Investing involves risk, including the possible loss of principal.
This information should not be considered investment advice or a recommendation to buy/sell any security. In addition, it does not take into account the specific investment objectives, tax, and financial condition of any specific person.
This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. This material and/or its contents are current at the time of writing and are subject to change without notice. This material may not be copied, photocopied or duplicated in any form or distributed in whole or in part, for any purpose, without the express written consent of Hartford Funds.