We all know that the longer we save for retirement, the greater possible chance you’ll give yourself to reach your retirement goals. When we run the numbers, we see that an adult who begins saving for retirement in earnest at age 21 is going to be at a great advantage to someone who doesn’t begin seriously saving until age 35 or 40.
For example, let’s take a look at two individual who are using their self-directed IRAs to save for retirement. The first person begins making $5,000 annual contributions to their account at age 25, and does so every year until age 67. The second individual doesn’t begin making those annual contributions until age 35, but again does so until age 67.
Assuming an 8% annual rate of return, by the time those two people reach age 67, the first will have accumulated almost $1.8 million in their account, while the second will have accumulated less than $800,000 in their account. In other words, even though the second individual still began saving for retirement relatively early in life, the fact that they started saving ten years later than the first person resulted in an account that was less than half the value of the person who began saving at age 25.
The situation is even worse for someone who doesn’t begin saving until age 40. Under the same set of assumptions, that individual will have accumulated just over $500,000 by the time they reach age 67. This is significantly less than one-third of the amount of the nest egg of the individual who began saving at age 25.
These figures are compelling, but the downside of examples such as these are that they can lead some individuals to conclude that somehow they’ve missed their opportunity to build the biggest possible nest egg, and that it’s not worth bothering saving at all.
Instead, the best path forward is not to compare yourself to what could have been if you had started saving earlier in life. Even in the “worst case” scenario we discussed above, the person who only began saving at age 40 was still able to accumulate over $500,000 in their self-directed IRA. And this represents just a single retirement account, does not involve making the maximum contributions each year ($5,500 in 2014), does not take into account the availability of being able to make “catch up” contributions (an additional $1,000 per year for account holders age 50 and over), or future increases in the contribution limits.
Furthermore, that same individual can also save for retirement in taxable accounts, and through any employer sponsored plans they have available at work. In short, starting saving for retirement earlier in life is almost always a good thing, but it’s never too late to start.