We all know how difficult it is to start and then commit to good habits. All we need do is think about the various new year’s resolutions we have made (go to the gym, get on a diet, go to bed earlier etc.). We start with good intentions but then we just never quite get to the fully committed part and we never form the habit.
Saving money, especially for retirement, is one of those habits we know we need to make part of our life but never quite get to. There is always something else that “demands” some amount of our financial resources. We tell ourselves “Everything I have left at the end of the month I’ll put in my savings or brokerage account”. Except we all know that rarely if ever happens. If we don’t pay ourselves first, we won’t pay ourselves at all.
The cost of waiting to save can be substantial, especially the longer a person waits. The graph below shows how the cost of waiting increases over a 20-year period.
To put some numbers around it, assume Sally starts saving $6,000 per year and earns an annual 6% return. After 30 years her $180,000 has grown to $475,000. If Sally waits only 5 years before she begins investing the same amount at the same rate of return, she will have $330,000. The cost to Sally of waiting 5 years is $145,000.
Another way to look at it is how much extra you must save to catch up. Let us say Sally is 35 years old and wants to retire at 65 with $1,000,000 in the bank. Assuming she has no savings and earns 6% on her money she will have to save $13,000 per year. If Sally waits till she is 40 she must now save $18,000 per year. It will cost Sally an extra $5,000 per year to reach her goal of $1,000,000.
Lincoln Financial Group has a neat calculator that can be used to help illustrate the cost of waiting to save for retirement (Cost of Delay Calculator). As Wealth Advisors, we always tell our clients and prospective clients it is never too late to plan, and that is true; however, the earlier you start the less challenging it is to reach the goals you want to achieve. At Sierra Pacific Financial Advisors, we are happy to help folks take the first steps to saving and creating a solid financial plan. Feel free to schedule a meeting with us. You may click on the following link to set a meeting with one of our Wealth Advisors. SPFA Meeting Schedule