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.
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: