Every teen, college kid and twentysomething has heard it a million times: start saving now. Below is an image that brings it home at a gut level.
Simply put, investing early can mean the difference between building a pile of money $479,000 high by age 70 or a pile that’s $3.4 million in size.
Our graph below shows the saving progress of three different people. They all save $500 a month and they all invest their money with an 8% interest rate. The only difference is when they start.
By the end of the first year of saving $500 a month, they all have $6,000 saved. For simplicity, we’re assuming the interest compounds annually at the beginning of each year. By the end of year two they’ve all saved another $6,000, but they’ve earned $480 in interest for a total of $12,480. The next year they save another $6,000 and the interest is applied to what’s in their accounts so far, giving them $19,478.
As Time Goes By
By year 15, the saver who started at age 20 has amassed $162,913. The saver who waited until age 35 has a mere $6,000. The third saver hasn’t begun yet.
By year 25, the saver who waited until age 45 has put the first $6,000 into their account. The saver who waited until age 35 has $99,873 in savings an interest. The saver who started the earliest? That person’s account balance stands at $438,636. That saver is only 45 years old and is already about halfway to becoming a millionaire.
In fact, she’s more than halfway. She’s been saving for 25 years, and just ten years later her account has reached $1,033,901. She’s still ten years away from the traditional 65 year retirement age. The saver who waited until age 35 to start saving has about a third that amount at just $302,538. The saver who waited the longest only has $99,873 in the bank.
Savings by Age 65
Fast forward another ten years. All our savers have reached age 65 and are ready to retire. The one who started the earliest has seen her net worth more than double in just ten years. She now has $2,319,034 invested. Assuming she lives to age 95, cashes in all her earnings now and lives on $77,000 a year, she can spend the next thirty years enjoying sailing or hikes, take up painting or write 30 books. She probably won’t – cash it all in at once, that is. Instead of pulling her money out of its investments, she can leave it in and live off the interest of $185,522 per year. Her $2,319,034 will stay exactly the same size until age 95 and keep pumping out that $185,522 every year like a big green clock.
The saver who waited until age 35 to start isn’t in a terrible position. He has $740,075 in the bank. If he lives to age 95 and cashes it all in now, he can live on $24,669 per year. He won’t be exactly well off, but if his house is paid for he can probably make ends meet, provided he doesn’t get sick and get stuck with a big medical bill. If he leaves his money invested and lives off the interest, he’ll have $59,206 a year. That’s assuming the market keeps churning out 8% annually and a bubble doesn’t burst. That’s not as nice as $185,522, but it’s not subsistence level either.
When You Wait, it’s too Late
What about the saver who waited until age 45? The magic of compound interest just won’t work as well for him. He’ll hit age 65 with $302,538 saved. If he cashes it all in and tries to live on the proceeds, he’ll have to make do with $10,084 a year. That’s $1,586 under the poverty line. Even if he leaves the money invested and lives off the interest, he’ll have only $24,203 per year to live on. He may need to get a job at Walmart or McDonald’s to supplement his income in his golden years.
If our savers push back retirement until age 70, our first saver will end up with $3,442,621, our second with $1,112,613 and our third with $479,726. While there’s a huge spread between them, they’re all still literally years ahead of most Americans. The typical U.S. citizen has $0 saved. That means most of the people you see day to day will never retire. There will be no golden years for them. Just more years of work without end.
Here’s the complete table behind the graph:
Starting to Save at Different Years
|Years||Start Age 20||Start Age 35||Start Age 45|
Article Source: Median American Savings: $0 – Fox Business