December 8, 2009

People graduating from college and entering the workforce are likely to have a lot on their mind. Buying a decent car, purchasing a first home, getting rid of their college debt, etc. Saving for retirement often isn't very high on their list. It is something they figure they have plenty of time to worry about so they'll worry about it later. Many people don't get started until their 30's or even 40's. But what people don't realize is that this decision can greatly affect what kind of lifestyle they can afford to live during their retirement.

The rule of 72 shows us that money will double every 7.2 years if it earns an average of 10% a year. Because that is a rather lofty goal -- particularly as of late -- we will assume earning 7.2% per year, which doubles your money every 10 years. Under this assumption, someone who has accumulated $10,000 in investments by age 35 will have $20k invested at age 45, $40k invested at age 55 and at age 65 (a time when they might consider retiring and beginning to live off of the money they saved) this amount increases to $80,000. Had the same person started saving money and accumulated $10,000 by age 25 they would have $20k at 35, $40k at 45, $80k at 55 and $160k at age 65. A considerably noticeable difference, especially since under our assumption the person never invested another dollar after they put the first $10,000 away! This doesn't mean writing a check for $2,000 once a year either. Most plans allow for participants to put away small amounts like $50 or $100 a month. The earlier you start putting some money into an account, whether that be an IRA or employee sponsored plan (401k, 403b, etc.) the better shape you will be in for your future.

Steve Hicks

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).