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The BIG Advantage of Saving sooner Rather than Later

We know you have lots of goals and, as the other pages of this website show, are prepared to help you achieve them. However, the purpose of this page is to show you that by starting to save sooner rather than later, you greatly reduce the total amount you have to put into savings.


Table. What saving $100 per month grows to at retirement
and
The retirement income this will give you
Age saving startsAmount Saved at age 65 At 1% Return Total Amount at 65 Income per Month at 1% Return At 5% Return Total Amount at 65 Income per Month at 5% Return
20$54,000$67,800$56$191,000$796
25$48,000$58,600$49$145,000$604
30$42,000$50,000$42$108,000$450
35$36,000$41,800$35$79,700$332
40$30,000$33,900$41$57,200$238
45$24,000$26,400$22$39,600$165
50$18,000$19,300$16$25,900$108
55$12,000$12,600$11$15,100$63
60$6,000 $6,100$5 $6,600$28

The table shows three things.

  1. Given the same monthly payment into your savings account that the sooner you start saving the more you will save.
  2. Alternatively, to reach the same saving goal buy starting sooner you not only have to save less each month but the total amount you need to save is less.
  3. However, the return you get on your savings has a BIG impact on how much you have to save in order to reach your goal.

For example, if you start saving $100 per month at age 30 but your savings earn only 1% per year (the historical after inflation return on savings accounts) you will have $50,000 in your account at age 65. However, if your savings earn 5% per year (the historical after inflation return of the stock market) at age 65 your account will be worth $108,000 -- over twice as much as the account that earned 1%. Even more important, at a 5% return, this $108,000, the result of saving $100 per month, will give you an income of $450 per month for the rest of you life and, if you bequeath this sum to your children, it will give them an income of $450 for the rest of their lives too! If you started saving just 5 years earlier, at age 25, you would have an income for life of $604. Start saving five years later and the income would only be $332.

So whether you're just graduated from college or just getting your career off the ground it is not too soon to start building your financial future. A lot of people starting out want to focus solely on buying a house, starting a family, or just having fun before they start thinking about saving for their children's education let alone starting to save and invest for retirement. Unfortunately, as the table shows, delay is expensive. For example, many people don't get serious about saving for retirement until they are age 50. If you do that you will have to save twice as much over one third the period of time as someone who started saving at age 25. Thus, if you wait until age 50 to start saving for retirement you will have to take 6 times more out of each paycheck and put it into savings than someone who saves steadily starting at age 25.

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Note: We used the 1% and 5% rates of return in the table above because 1% per year after inflation is the average return over the last 100 years on bank savings accounts and 5% per year is the average return over the last 100 years of the stock market. As you can see, when the time span involves decades, the investor in the stock can expect to ultimately have far more money to spend than the saving account holder. Of course, the extra return from the stock market comes at the cost of greater uncertainty. The 5% return is the average over the last 100 years. However, as you know, the returns from the stock market vary wildly form year to year -- it is not uncommon for the stock market to go up over 20% in a single year and then lose 20% or more the next year. Over time these year to year fluctuations average out but even so returns can still vary from decade to decade. For example, the average stock market return for the fifty years from 1900 to 1950 was significantly lower than for the 50 years from 1950 to 2000.

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