Recent research compiled by Vanguard Investment Counseling shows those who start saving for retirement in their 20’s can save nearly double what investors beginning in their 30’s can put away for retirement. A participant who starts making contribution of $1,000 annually at age 25, with an average annual return of 6%, is estimated to have an account balance of $83,802 by age 55 and $150,076 by age 65. A participant who does not start saving until age 35, however, could contribute at the same rate but would not save $83,802 until age 65, falling $66,274 behind the saver who started 10 years earlier and contributed only $10,000 more. Of course, the greatest challenge for young investors is getting started. The power of compounding, or generating earnings from previous earnings, is important to everyone, but makes a huge difference for young people.
The research shows it is important to implement investment education early. Young people face many competing savings goals such as buying a house, paying for a wedding or their children’s college education, but retirement savings should still be factored into a financial plan earlier in their career. Many things can be paid for with loans, but retirement cannot, which is why retirement saving must be a priority.
A post-graduate employee with student loans should still contribute to a retirement plan. This is not to say student loans debt should be neglected, but a plan should be in place to pay off debt while simultaneously saving for retirement. Research also suggested while a 3% retirement savings deferral rate is common, it is too low. A more optimal savings rate would be annual contributions of 12-15% of earnings. If you cannot start off at that level, an employee should use automatic escalations each year to get to a preferred rate of savings if possible.
Young investors may be hesitant to invest because of the market performances in recent years, but research has emphasized that volatility is typical throughout history. They should not focus on market volatility because they are being exposed to it early and can still bounce back. Worrying too much about volatility can cause young investors to avoid market risk and expose themselves to a bigger risk – inflation. Also, young investors should not try to time the market and chase performance. Studies show that investors who attempt this have lower performance than those who pick an asset allocation and stick with it. To get the best “bang for your buck,” portfolios should be broadly diversified, especially in your early years of investing. So get started now!!