Need proof?

Posted by on December 12, 2011 @ 1:05 pm in investing

In response to my most recent post, “Give ‘thoughtomation’ a try,” I received this helpful idea from a reader:

“Why don’t you post a spreadsheet with comparisons of saving early vs saving late in life? That is the most important thing young investors need to see.”

Thanks for the suggestion! Take a look at the graph below, and it becomes clear just how much of a difference it can make to start investing early. This example assumes a monthly savings of $500 and a 4% annual return. The numbers are even more compelling when you consider the potential for higher annual returns.

Estimated balance at age 65

Based on the assumptions applied, someone who starts saving $500 per month at age 20 will theoretically end up with about $750,000 at age 65. Compare that with someone who starts at age 40 and ends up with $250,000. The 20-year-old only invested $120,000 more than the 40-year-old ($500 per month for 20 years) but ends up with $500,000 more. That $380,000 difference illustrates the power of compounding and could make a huge lifestyle difference during retirement.

Try it yourself with Vanguard’s retirement calculator.

Notes: This hypothetical illustration does not represent the return on any particular investment. All investments are subject to risk.

A reader suggested modifying the chart to make it a little more clear. Here’s an updated version that better illustrates the value of getting an early start. The longer you wait to start investing, the less the potential for growth:

Hypothetical portfolio value at age 65

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