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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.
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.
Are You Retirement Ready?
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.”
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.”
Are You Retirement Ready?
“So if you’re wondering when you should start saving, it’s now,” CNBC says.
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As a financial expert with extensive knowledge in investment strategies and retirement planning, it's crucial to emphasize the significance of early retirement savings, a topic highlighted in the provided article. The principles discussed here are well-grounded in financial theory and have been advocated by reputable institutions such as Vanguard and CNBC.
Firstly, let's address the concept of compounding, a fundamental principle in investment. Vanguard underscores the power of compounding, stating that starting early allows for more flexibility later in life. This assertion aligns with the idea that the longer your money is invested, the more time it has to grow, thanks to compounding returns on both the initial investment and the accumulated returns.
The article emphasizes the importance of time in building wealth for retirement. Vanguard suggests that with sufficient time, relatively small, consistent investments can lead to a substantial balance. This aligns with the understanding that time mitigates the need for larger investments due to the compounding effect over an extended period.
Furthermore, the article discusses the common shortfall in retirement planning among Americans. According to the Labor Department, only half of Americans have calculated their retirement savings needs, and a significant portion of workers with access to defined contribution plans fail to participate. This highlights the need for financial education and early planning to ensure a comfortable retirement.
The article also touches upon the estimation of retirement needs, citing the DOL's recommendation that retirees may need 70% to 90% of their pre-retirement income to maintain their standard of living. This emphasizes the importance of setting realistic financial goals and understanding the income replacement required during retirement.
CNBC delves into specific scenarios, demonstrating the impact of starting to save at different ages. The breakdown provided illustrates the substantial difference in outcomes based on when an individual begins saving. The examples emphasize the financial advantages of starting early, showcasing the potential for significant returns through compound interest.
In conclusion, the information presented in the article aligns with established financial principles. The importance of early retirement planning, the power of compounding, and the impact of time on investment returns are crucial concepts for individuals seeking financial security in retirement. As an expert, I would strongly advocate for proactive financial planning and an early start to retirement savings to maximize the benefits of compounding over time.
