The Cost of Waiting ONE Year!

After messing around with the retirement savings calculator I built, I started thinking about the cost of waiting just one year to start saving for retirement. The impact is huge! Take a look at the chart below:

Saving for Retirement

I assumed the following:

A person starts saving $2,000 per year at age 22. The account grows at 10% per year. At age 65, they could have $1,184,801.

I then made $1,184,801 the retirement goal and figured how much would have to be saved each year if the person waited one more year to begin saving. So, if they waited until they were 23 to start saving, they would need to save $2,204 PER YEAR in order to reach $1,184,801 by age 65. Pretty amazing isn’t it?

Now let’s look at it another way.

Let’s say everything is the same but this time, they want to save the same amount each year no matter what year they begin saving. What rate of return do they have to get in order to reach their goal?

Saving for Retirement

So, by waiting just ONE year, this person’s required rate of return jumped from 10% to 10.34%!

The point of all this is:


18 thoughts on “The Cost of Waiting ONE Year!”

  1. For those who let a year or two slip past you, don’t give up hope. Imagine that you are the hypothetical 23-year-old looking at this. You don’t have to come up with $204 more every year for the rest of your career to save for retirement. You can save an extra lump sum today equal to what you would have already saved plus interest. If, in addition to this year’s $2000, you have another $2200 that you can put into your retirement savings, you have made up the lost year.

    Don’t ever try to convince yourself that you can make up for not saving for a few years by saving later. It will snowball. You’ll establish a lifestyle that depends on too much of your income to ever make up for lost time. But if you didn’t save enough last year. Resolve to find the extra money somewhere *this year* and make up for the lost time. When you are in your 40’s like me and looking back, you won’t have regrets about your retirement savings. You’ll look at a healthy net worth and be much more relaxed. Yes, I still need to work for the next 20 years before I retire, but I’m not looking at a frantic attempt to save money I can’t afford to live without.

  2. You forgot to factor in inflation, which is about 10 percent YoY for the OECD, based on money supply growth. Also, a 10% RoR is damn near impossible. The exception is short term growth in things like hedge funds. That is b/c we are in a financial bubble. Once that pops, things will revert to mean (or worse in the SR). In the long run, growth of 5.5% ( the return on U.S. T-Bills) is the standard RoR for these sorts of projections.

    The analysis is flawed, and overstates these benefits. That said, I still agree with the basic message. Start saving early. Keep your wealth in hard assets as well as assets that yield return.

  3. Investing in stocks is what I’m assuming this article is referring to. The stock market today is barely up from when GWBush took office 6.5 or so years ago. If you adjust for inflation it’s none. So yes you may have stocks but are they REALLY worth more?

    What if you want to go to Europe and spend your money? When the Euro debuted it was at 1 to 1 with the dollar. It quickly fell to around $0.85 to buy 1 Euro. Now it’s roughly $1.4 per Euro. Why is this? Piss poor fiscal/monetary policy and massive deficits.

    If you TRULY want to be wealthy and ACTUALLY diversified. Don’t just invest in US held stocks & bonds. Divide your money 1/3 to Dollars (Dow Index for 75% and Bond Funds for the remainder), 1/3 to Euros (1/2 German Index, 1/2 French Index since they are relatively stable), 1/3 to Pounds Sterling (FTSE is a good bet IMO).

    This why you’re not only investing, you’re immunizing yourself against an Argentinian/Mexican/Asian money crisis which is sure to hit the US when our Dollar crashes do to our oblivious drive into ruining our future by the “we’ll pay for it later” mentality of this current regime.

    Another opportunity is instead of investing in something passive that you don’t control, you could always invest in your own company. I did and have no regrets πŸ™‚

  4. I dont think the post is specifically about Stocks Rob, that being said I do like your diversification strategy. Anyhow the message of saving and putting money into assets is an important one and one that all should be following.

  5. Wow, a bit of animosity off a pretty decent post. Yea, we’re using hypotheticals here, but it is just making the point of saving early as best you can, or else just win the lottery, that could work too – πŸ™‚ Nice post…

  6. The amount that retirement-savings takes up of your salary is hugely important.

    Age 23 (first year out of university earnings) 25k – 2k = 10% of earnings
    Age 30 (Mid point of career earnings) 50k – 4.3k = 8.6% of earnings

    One needs to look at the circumstances. We should always try to put money away for our long term future, and it is certain that the longer that money has to invest/appreciate then the less that needs to initial put in, but that is not the same as understanding somebody’s entire income and debt portfolio and deciding what is the best structure for them.

    They may be on a low salary with high debt. It may be best to clear debt then consider the future. It may be best if their career is likely to see a major increase in salary (e.g. trainee lawyer to full paid lawyer) and that they are best structuring their savings to when they can most afford to pay more.

    The key is understanding that the longer it is left the more you must put in to get the same out as those who put less in earlier, but that does not mean that by waiting you are making a financial mistake – it really does depend on the best use of your resources at the time.

    The figures are pretty much unquestionable – 10k given 20 years to increase will be worth more than 10k given 15 years… that doesn’t mean 10k is always the best financial route.

  7. Pingback: Me vs Debt

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