Congratulations to the recent college graduates. Let me share a piece of wisdom your commencement speaker may have omitted: Save early; save often.
Many of you will find yourself going from a part-time job to earning an average of $43,000 a year according to the National Association of Colleges and Employers. While it is tempting to buy the things you never had in college, now is the time to begin saving for your retirement. The small amount you can save while you are in your 20s will have time to grow, and you can take advantage of compounding. Compounding is when $2 becomes $4, $1,000 becomes $2,000, or $1 million becomes $2 million. In reality, waiting to save money does not cost you the compounding from $2 to $4, but the compounding from $1 million to $2 million.
As a young investor, you may consider a Roth IRA, because you will likely meet the income limitations; after-tax contributions and earnings will grow tax free, and distributions after 59½ will be tax free. Consider the following: A 25-year-old investor makes a one-time contribution of $5,000 to a Roth IRA. The contribution grows at 10% annually with all earnings and interest reinvested until age 60. By then, the contribution made at age 25 should have grown to an estimated $140,512. If you wait until you are age 30 to make your first investment, assuming the same growth rate, your contribution should grow to $87,247 by age 60. Delaying five years, theoretically, cost you more than $50,000 in retirement savings.
If you were able to contribute $5,000 each year for 10 years beginning at age 25, assuming a 10% annual growth rate, by age 65, your account should be worth $1,529,542. However, if you wait until you are 35 to begin investing the same $5,000 each year for 10 years, your contributions should only grow to $589,705—a difference of nearly a million dollars!
While these examples are hypothetical, the math behind them is accurate. Time is your best advantage when you save for your retirement. It can be a struggle to make Roth IRA contributions when you are young. When you get your first job, enroll in your company’s 401(k) plan, and contribute at least enough to get the employer match. A match is a 100% return on your investment—something you will absolutely not get anywhere else. When you get a raise, increase your contributions. Consider it money you never had, and you will never miss it.
At Henssler Financial we believe you should Live Ready, which includes taking advantage of your investing time horizon while you are young. If you have questions regarding your investment planning, the experts at Henssler Financial will be glad to help. You may call us at 770-429-9166 or email at experts@henssler.com.