“Time is money.” — Benjamin Franklin
No matter where you are in your life or how much you have in your retirement account, your employer-sponsored retirement plan may have features that will help you build your nest egg.
First, it offers the advantage of compounding, which is the ability of your earnings to grow on each other, tax free, until withdrawal. Second, many plans offer matching contributions, essentially “free” money, which are made on your behalf by your employer. Third, your plan offers you a range of funds from which to choose. The earlier you put these elements to work in your plan, the better off you’ll likely be in the long run.
Investing at Age 25
Say, for example, you’re 25 years old and just started working. Even if you don’t make much money and have little income to spare, a small contribution could grow into something meaningful by the time you retire. A contribution of just 2% from a $25,000 annual salary is just about $10 out of your paycheck every week. If you increase your contribution by just 2% each year until you reach the maximum the company allows, for example 10%, and earn a 10% return on your investments, you would have $1,437,543 by age 65.*
Investing at Age 40
Now we all know life happens and not all of us start building nest eggs at such a young age. But what about when you turn 40 and suddenly realize you have saved little or nothing for retirement? Don’t panic. You can still make up for lost time, but you may need to put your plan into high gear.
First, start contributing as much as possible to your plan. Starting at 5% and increasing it 2% each year until you reach the company maximum might be a place to begin. Then it may help to invest in more aggressive funds, such as stock funds, which are subject to short-term volatility but have historically generated higher long-term returns than all other asset classes. The accompanying chart shows you how much you could accumulate in 25 years.
How Your Savings Could Grow
As you can see, for someone who starts saving at age 40 and saves steadily until age 65 it is possible to accumulate a significant nest egg.**
Whether you’re fresh out of college, approaching retirement, or somewhere in between, there’s no time like the present to take advantage of your employer-sponsored retirement plan.