Compounding Your Way to Retirement

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Let’s say a 20-year-old woman opens an IRA and puts in $5,000. She never makes any additional contributions and doesn’t touch the money until she’s 65, at which point, assuming an 8% annual return, she’ll have $160,000.  Take that very same one time investment but make it a 40-year-old woman and she’ll only have $34,000—In this case, two decades equals $126,000. Time is the critical factor here.

But let’s go one step further and say our 20-year-old socks away $5,000 every year—dollar-cost averaging for the next 45 years until her retirement? She’ll be sitting pretty with $2 million. (Our 40-year-old would have just $400,000.)

So what’s the holdup?
Not surprisingly, most 20-year-olds don’t spend time thinking about retirement. It’s the older set that worries. In a survey released last month, The Employee Benefit Research Institute found that 28 percent of respondents had no confidence at all in affording a comfortable retirement.  That’s the highest number ever recorded since the annual survey began 23 years ago.

People aren’t confident because they know they’re not saving enough each month. Part of that, certainly, is that Americans are struggling just to keep up with day-to-day expenses and the rising cost of living. But I think there’s something else at play: Fear. BlackRock did a survey last fall that found more investors spend time planning vacations than planning for their retirements. Vacations! Planning for retirement isn’t a priority because it’s scary to imagine we may not have enough—and it’s easy to continue to bury our heads in the sand and draft our itinerary for Florida.

This ties into what I call the stinky refrigerator problem. Instead of biting the bullet and taking the time to sit down and look carefully at our financial goals and how we might meet them, we take the time to see what’s to blame for that smell in the fridge!

Retirement is an easy topic to put off when we’re constantly sidetracked by more immediate issues. People spend a TON of time on home improvement projects, and that makes sense. It’s where you live and there’s an immediate uptick in your quality of life when you fix something around the house. But believe me, you’re going to have a MUCH stinkier mess on your hands if you don’t start saving NOW for retirement.

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