Time: Friend or Foe?

The sooner you start saving, the less you have to put away each month to accumulate the needed funds for retirement. For example, say as a 25-year-old you open an IRA and save $100 a month ($1,200 per year). The IRA earns an average of 6% a year. After 40 years — when you’re 65 and ready to retire — your account balance could grow to over $185,000.

But let’s say that, instead, you put off saving until you were 45. At the same rate of saving in an IRA with the same returns, by the time you’re 65, your IRA balance would be just about $44,000. Starting when you’re 45, you’d have to contribute $420 a month to save about $185,000. At least that would be less painful than if you waited until you were 55. Then, to match the end result, you’d have to save $1,175 per month. (These examples are provided for illustrative purposes only and are not intended to project the performance of a specific investment vehicle.)

One way that people often try to compensate for getting a late start in saving is to shoot for a higher rate of return. Instead of settling for the 6% a year we used in the example above, why not go for 10%? But there are two problems with that strategy. The first is that stocks don’t always provide consistent returns.

Second, to earn higher rates of return, you have to take on more risk. Whenever you absorb a big one-year loss, it takes a higher-than-normal rate of return in following years to break even.

Everyone knows that time is money. Not everyone realizes that time spent not saving can have a significant cost, and that there are only so many ways to make up for it. It’s never too late to increase how much you save, but if you feel like you’re not where you should be on the road to retirement, the sooner you start putting more money aside — and investing it wisely — the better.