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How Saving Early Pays!


Here's why saving a little for retirement now can mean a lot later.


It's tempting to procrastinate about retirement savings. After all, you'll be working for 40 or 50 years and probably have much more urgent concerns - like student loan repayments and credit card debt. With so many bills, there isn't much to put away for something so far off. So why not wait to save for retirement until you're a bit more financially secure?


Because some long-term financial opportunities are just too good to pass up, even if you're just getting started. What's more, making small sacrifices today can lead to big savings in the future.


Successful investors, like Warren Buffett, understand that the cost of a small purchase today represents a lost opportunity to invest the money and have it grow - significantly - through the power of compounding. According to Alice Schroeder's bestselling biography The Snowball: Warren Buffett and the Business of Life (Bantam, 2008), Buffett often asked himself, "Do I really want to spend $300,000 for this haircut?" Next time you're at a coffee shop buying your daily latte, ask yourself if you really want to spend $250,000 for it.


One of the best deals around is an employer-sponsored retirement plan such as a 401(k) plan. These savings plans allow you to make pre-tax contributions automatically from your paycheck, and you won't have to pay taxes on any earnings until the funds are withdrawn. What's more, many employers will match a portion of your contributions, essentially giving you free money - another powerful incentive to start saving today.


Just look at the difference between how much money Emily, age 25, will accumulate by starting to invest now, compared with Michael, who waited until he was 35 to begin investing:


"Early Investor": At age 25, Emily starts saving $100 a month. After 20 years, she stops saving; total investment: $24,000. Savings at age 65: $266,914


"Late Investor": At age 35, Michael starts saving $100 a month. After 30 years, he stops saving; total investment: $36,000. Savings at age 65: $141,761.

 

In addition to the assumptions that are listed for Emily and Michael, this hypothetical illustration assumes an 8% annual effective rate of return. There is no guarantee these figures will be attainable in the future. Returns are not indicative of the performance of any specific investment. Investing in mutual funds involves risk and there is no guarantee of investment results.

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