My two “tween” daughters pick up all sorts of interesting language at school or on the sports fields. While our conversations are usually about why such words shouldn’t be a part of their vocabulary, there is a pair of four-letter words I intend to teach my daughters that they might not otherwise learn at such young ages: S-A-V-E and T-I-M-E. I know your mind probably went somewhere else; what words did you think I was going to say?

For many younger investors, saving for retirement may seem like a daunting task, but it doesn’t have to be. Because this is National Save for Retirement Week, it seems like the perfect opportunity to talk about this topic.

While I realize the idea of saving at this point in your life for something that is likely 30 or more years away may not be at the top of your priority list, I’d like to share with you the advice I would give to my daughters:

  1. S-A-V-E (for yourself). The surest path to a successful retirement is for you to save for yourself. While the markets or your employer can certainly help, they can’t be relied on to do all of the heavy lifting—that part needs to come from you. If you’re fortunate enough to work for an employer that provides matching 401(k) contributions, be sure to take full advantage. Every dollar your employer saves on your behalf is a dollar less that you have to save. Essentially, this is a 100% return on your investment, which is a rarity. For those who don’t have an employer plan or match, you can save in a traditional IRA, Roth IRA, or a taxable account (depending on your circumstances).
  2. Develop good habits by “paying yourself first.” By this I mean have your savings automatically deducted from your paycheck. While the initial amount may not be a lot—especially given other financial obligations you might be juggling such as college debt, saving for a home, or the financial responsibilities of having children—consistent savings and the power of compounding over time can go a long way.
  3. Increase your annual savings to coincide with the raises you receive at work. I’ve found this to be an effective way to increase my savings rate through the years. And as your salary increases over time, these savings bumps can make a meaningful difference in the amount you have at retirement.

Too often, the idea of saving more (or spending less, depending on your disposition) has a negative connotation: To save or invest for the future, you must forgo spending money today. But this perspective ignores an important point that might even have been lost on Ben Franklin: A penny saved can equal a lot more than a penny earned, particularly for young investors who have T-I-M-E on their side.

Investing is a partnership where the investor provides the capital and the market provides the return on the capital. Given time and even a modest return, small savings can really add up. For example, if you skipped a few impulse purchases at the checkout line, turned down the heat (or turned up the AC) a little, or brought lunch to work a few days each month instead of eating out, how much could you save? $50 a month? $100? More?

(Video: How to assess your retirement readiness)

Let’s look at a hypothetical example. Assume you save $100 a month by trimming expenses here and there. Also assume that you earn a modest 4% real (inflation-adjusted) return on the money you save. A year later, you’ve earned $26 (not counting the $1,200 you saved—more on that in a moment). After ten years, you’ve earned $2,774 and after 30 years, it’s $33,636.

Now, you may be thinking that $33,636 might not be worth 30 years of brown-bag lunches—and to a point, you might be right. But if you ended up needing that money in the future, I doubt you’d regret all those homemade lunches and other foregone purchases. For many people, $100 a month wouldn’t be that much of a sacrifice. We all probably have a lot of other areas where we can save as well—resulting in an increase in our monthly savings assumptions.

So far, we’ve talked about returns, rather than overall growth in wealth. In our $100-a-month example, the total portfolio, including savings plus net earnings, would be worth $69,636 after 30 years. That’s a lot of extra wealth to provide for future spending needs—just by saving a bit of money on purchases you may be able to do without.

To give you an idea of the impact of additional daily/monthly savings, below is a chart showing savings scenarios for a hypothetical investor whose investments receive a 4% real return:


For this hypothetical investor, moving from $100 to $200 per month requires an additional savings of a little more than $3 per day, while a $500 monthly contribution requires an additional savings of a little more than $13 per day. Over time, those higher savings levels could add up to hundreds of thousands of dollars in additional assets ($69,636, $139,273, and $348,181 respectively), hopefully allowing you to spend your retirement doing the things you enjoy most.

My advice to investors—even very young ones like my girls—is to focus on things you can control: S-A-V-E early in life and put T-I-M-E on your side. Fortunately, these are four-letter words that are more likely to let you end up retiring your way, rather than ending up in detention.

For more information about saving for retirement, or to open a retirement account, click here.

(Editor’s Note: This post was updated on November 22, 2016.)

I’d like to thank my Vanguard Investment Strategy Group colleague Don Bennyhoff for contributing to this blog.