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Why Retirement Planning Should Start Sooner

June 15, 2016

Planning for retirement is a marathon, not a sprint. You cannot possibly save enough money to retire comfortably if you put the task off until the latter stages of your professional career. Even though you may not be earning as much in your youth, it is productive to start retirement planning sooner rather than later. The question that many of us will face is, why this is so important?


You Could Reach Retirement Sooner!

There are not that many people who can honestly raise their hand and say they love their job. For most, a career is rewarding, but still just a means of paying the bills and supporting a given lifestyle. Spending less money than you earn and investing the difference is a cornerstone that can help you build a successful retirement plan. When you accomplish this earlier in life, you will significantly boost your chances of reaching financial independence, and even retirement, at a younger age.


Recent surveys suggest that individuals who start saving in their 20s are 66% more likely to reach retirement by the age of 60, compared to those who wait until their 30s to start saving.


How to Make it Happen

Business Insider notes a report from the Economic Policy Institute (EPI) that found older individuals were more likely to have a savings account, while younger adults were least likely. The EPI figures found that 61% of individuals between 56 and 61 had a retirement account (the highest percentage), while just 51% of those between 32 and 37 had a retirement account (the lowest percentage).


If you want to reach retirement sooner, avoid procrastinating and start saving now. Old habits die hard, as they say, but if you do not start planning for retirement now, when will you? Roughly 52% of Americans started saving by the age of 40, but saving rates do not generally improve for most until they near retirement age.


The problem is that people are now living longer than at any point in human history, which means supporting yourself financially for a longer period of time. With an ever-changing economy outdating the skills of older workers more than younger workers, there is an increasing burden on retirement savings accounts to carry the load during retirement.


More Time to Save Means More Money

By starting your retirement planning sooner, you can take advantage of the most powerful tool in the world of savings: compound interest. This type of interest calculates based upon the previous balance in a given account, plus the latest period's interest rates. In short, the money you earn from your investments is reinvested for an opportunity to earn even more money.


For example, a person who invests $5,000 annually between the ages of 25 and 65 will have $602,070 by the age of 65, assuming a 7% return. Conversely, an individual investing $5,000 annually between 35 and 65 (one decade less), will earn only $540,741 by the time they reach retirement age. *


Make no mistakes, market returns are not guaranteed and can experience greater volatility than just 7%, but the math shows the long-term benefits of compounding returns over a longer period of time. So quit stalling and get started saving today!

*This is a hypothetical example and actual results may vary.

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