When I took Personal Management merit badge, I wish they had spent more time in the book promoting the value of planning for retirement from your first paycheck.
Now, don’t get me wrong, there’s lots of great information to learn in the merit badge program — savings versus investing, budgeting and so on; however, I think there are a lot of Scouts who could have benefited from the advice in a recent “Business Insider” article (click HERE).
From the article:
If you want to have a comfortable retirement, it is very important to begin saving early. It’s a point that can’t be reiterated enough.
Here is another example why.
Consider two hypothetical savers, Emily and Dave. Emily puts $200 per month into a retirement account with an estimated 6% rate of return starting at 25. Dave starts saving $200 per month at 35, just 10 years after Emily.
Both continue to add $200 each month until they retire at 65.
By the time they are 65, Emily has contributed $96,000, while Dave has contributed $72,000.
Here’s the trajectory of both of those accounts:
While in this example, Emily put in more money (about a third more) than Dave by starting ten years sooner, she really outclassed Dave’s savings upon retirement – by about double! In fact, she ended up with slightly more than $400,000 but Dave ended up with slightly more than $200,000.
This is the power of compounding interest which is more fully described in another “Business Insider” article (click HERE) which examines how to end up with a MILLION dollars at age 65 by simply stashing some cash on a monthly basis when you get your first job.
In that article, they make an assumption that the rate of return on savings or investments is fixed at 6% regardless of when you start your saving for retirement (which isn’t a terrible way to illustrate the advantage of starting early since market rates can fluctuate from highs to lows throughout a person’s life).
From the article:
Here is how much you would need to save each month at a 6% annual rate of return, starting at different ages. So if you’re 20, and you want to retire a millionaire, you should be socking away $361 per month. If you’re starting at 25, that jumps to $499. You can see how as you get older, you need to be saving much, much more:
Bottom line: It is much better to start saving young. Two things are happening here. First, by starting to save at 20 instead of 40, you have many more individual monthly payments, and can spread out your total principal investment over a longer period of time. Second, and much more importantly, by saving earlier, you can better take advantage of compound interest.
I know there are smart Scouts out there who will say; “But wait a minute! If I can get a better average interest rate over time, I don’t have to contribute as much each month” That’s true. The article included a chart showing how interest rate would affect your monthly payment depending on when you started your savings adventure:
So, when you get your first job, you’ll be amazed by two things:
- How much money gets taken out of your check for taxes
- How much you could spend on eating out, getting a cool car, impressing your friends or generally wasting money without a budget.
If you’re smart, you’ll put money away each month and learn how to invest wisely. That way you won’t be surprised when you cash your final paycheck and wonder how you’ll be able to live on “what’s left” of your savings.