Yaёl Bizouati-Kennedy
·3 min read
While young people might have a variety of financial goals, such as buying a car or saving for a house, experts agree that thinking about retirement early should also be a priority. And the earlier you start, the easier it could be for you to become a millionaire.
All it takes is investing $1,000 per month throughout your career to maybe make you a millionaire, according to CNBC.
And according to Vanguard, the secret to actually reaching a million is not that hard: it’s time.
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If you give your savings enough time to grow, you’ll only need relatively small investments of money — made consistently — to wind up with a pretty big balance, Vanguard explains on its website.
“Because compounding is so powerful, starting early gives you more flexibility later on in life,” according to Vanguard.
It’s worth noting that only half of Americans have calculated how much they need to save for retirement, according to the Labor Department (DOL). In addition, in 2020, more than a quarter of private industry workers with access to a defined contribution plan — such as a 401(k) plan — did not participate. To put things in context, the average American spends approximately 20 years in retirement, so putting money aside is a habit better started early, the DOL recommends.
“Retirement is expensive. Experts estimate that you will need 70% to 90% of your pre-retirement income to maintain your standard of living when you stop working,” according to the DOL.
CNBC dug deeper to estimate exactly how much investing an extra $1,000 per month now will equal when you are ready to retire, assuming you put your money in a retirement account, you get an estimated 4% return on your investments, and you retire at age 67. CNBC also warns that the math doesn’t account for fees, taxes or “any curveballs that life may throw at you, so plan accordingly.”
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Here’s the breakdown, according to CNBC.
If you start saving $1000 a month at age 20 will grow to $1.6 million when you retire in 47 years. For people starting saving at that age, the monthly payments add up to $560,000: the early start combined with the estimated 4% over the years means that their investments skyrocketed nearly $1. 1million.
“Starting younger lets you take advantage of the power of compound interest,” CNBC says. “That means you get returns on the money you invest and even better, returns on your returns.”
If you wait until you turn 30, you’ll still earn more than $1 million. Starting at that age means that you will have set aside $444,000, and get nearly $600,00 in earned interest.
“There is a pattern the longer you wait the more money it will cost you in the long run. If you start making these savings at 40, they will grow to $500,000 for your retirement, with more than $300,00 set aside and $250,000 in return. And if you start at age 50, you will retire with $300,000 at 67, having invested $204,000 and getting back $90,000 in interest.”
“So if you’re wondering when you should start saving, it’s now,” CNBC says.
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This article originally appeared on GOBankingRates.com: Investing $1,000 a Month Could Make You a Millionaire When You Retire
I've spent years delving into financial planning, especially retirement savings and investment strategies. The article you mentioned highlights the significance of early financial planning for retirement. It emphasizes the power of compounding and time in building wealth.
Here are the key concepts:
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Compounding Interest: The magic of earning interest on both your initial investment and the accumulated interest over time. It's the driving force behind the advice to start saving early.
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Early Investments: Starting to invest early allows for a more extended period for your money to grow. This is evident in the examples given where individuals who start saving earlier contribute less but end up with larger retirement savings due to the longer time their investments have to compound.
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Regular Contributions: Consistency matters. Regular, consistent investments, even in smaller amounts, can grow significantly over time due to compounding.
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Impact of Delay: The article demonstrates the increasing cost of delaying retirement savings. Waiting even a decade can substantially reduce the eventual retirement corpus.
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Estimated Returns: The article assumes an estimated return rate of 4% on investments. However, it's essential to consider fees, taxes, and unforeseen circ*mstances that might affect actual returns.
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Financial Preparedness: Many people haven't calculated the amount needed for retirement, and a significant portion do not participate in retirement plans offered by employers.
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Retirement Income Needs: The Department of Labor recommends aiming for 70% to 90% of pre-retirement income to maintain a similar standard of living post-retirement.
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The Urgency of Starting Now: The article strongly advocates starting savings as early as possible due to the substantial advantage gained through compounding and time.
Remember, these are general principles. Individual circ*mstances, risk appetites, and market conditions can significantly influence outcomes. Always consider consulting a financial advisor to tailor strategies to your specific situation.
