I’m 24 With $37,000 Saved For Retirement. Is Saving ‘Easy’?
With costs rising and people living longer than ever before, it’s important to save for retirement even if it’s decades away. If you start early and donate often, saving can be a relatively easy process.
That’s the experience of a 24-year-old on r/personalfinance who got off to a great start with $37,000 saved in retirement accounts. The young saver said they were “shocked to see” that if they saved $100,000 at age 30, their savings could grow to $1 million at age 65 without incurring another penalty, assuming a 7% return adjusted for inflation.
This user is in a situation that many savers are not in: They are living at home after graduation, which means they have been able to focus on paying off all their debts in the past year, and putting money into their retirement accounts. But the user’s question about saving — “If I’m small is it really that easy?” – is one that many people may ask, and one that can be answered by looking at the power of compound interest.
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Pro tip: Save early and often, as compounding is key to capital growth
Saving for long-term goals like retirement may not be easy, but it can be easier if you create a strategic plan and stick to it. That’s partly because of compound interest, which is the interest you earn on interest. If you tend to deposit money early, you not only give yourself more time to save, but also your money more time to compound.
Michael Gruidel, a certified financial professional, outlines the importance of compounding and why it is one of the main pillars of financial freedom in a blog post for the Equity Planning website.
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“When it comes to building wealth, few financial principles are as powerful as compound interest,” Gruidel writes. “The effect may seem small at first, but imagine a snowball rolling down a hill, the longer it rolls the more snow there is to keep moving. Over time, this snowball effect leads to significant growth.”
Here’s an example from Gruidel: “Let’s say you invest $10,000 in an account that earns 5% annual interest, compounded annually. At the end of the first year, you’ll earn $500 in interest, bringing your total to $10,500. In the second year, you’ll earn no interest on your first $10,000 in the first year. You’ll earn 5% on your first $10,000 in the second year. of $10,500 you get $525 and bring your total to $11,025.”
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If you think about how much an investment like that would add up to over 40 years if someone started saving in their 20s and retired in their 60s, you can see how saving early can significantly help leverage compounded returns.
However, the statistics assume that the same growth rate holds over time. Unfortunately, the stock market may not always produce 7% annualized inflation-adjusted returns, like the figure posted by a Reddit user in their estimates. The stock market may crash as you save money, and you may need several years to recover from the crash. That’s why it’s important to not only rely on compounded gains, but also use smart investment strategies, such as diversifying your portfolio and rebalancing so that your asset allocation is always in line with your goals, risk tolerance and horizon.
