I’ll be discussing how 10 years of savings can be worth more than 30 years of savings on today’s “Closing Bell” with Kelly Evans and Scott Wapner.
Today’s 20-somethings have a unique–and easily blown–opportunity to set themselves up for their future. Because of the power of compounding, the money they save now for retirement is worth far more than if they start even a few years later. The idea that you can put it off and “catch up” when you’re older? Basically, it’s a myth, since it’s so very, very hard to make up for missing that early start.
NBC News columnist Bob Sullivan outlines how this works in “When $30k is worth more than $90k.”
The takeaway? Paying off debt is important, but not as important as saving for your future. Opportunities to save for retirement really are “use it or lose it,” and blowing them off could make your future self the real loser.
Please join us around 4:50 p.m. Eastern/1:50 p.m. Pacific for the discussion.
Your example ignores inflation: It’ll be a lot easier for the brother to come up with $3K (or much more) in 2053, when he’s 62, than it is for the sister to come up with $3K today. That’ll go a long way toward equalizing their nest eggs. (Or, if everything is already equalized into 2013 dollars, that means you’re assuming an 8% return after inflation, which is not terribly realistic.)
It’s still important to start saving early, of course, but overstating that importance can backfire, if people who didn’t save much in their 20s start thinking that they have no hope of catching up, so they might as well not even try. I see that attitude a lot among my fellow 30-somethings.
The Parable of the Twins also ignores deflation, where it gets harder to raise the money over time. And I would argue that people in their 30s may have higher expenses than those in their 20s, so that it isn’t necessarily easier to raise the funds.
As for the rate of return, it doesn’t matter. The stock market has returned at least an 8% average annual return in every 30 year period since 1928. Will it do so in the future? No one knows. But the parable works regardless of what rate of return you use. The person who gets the early start always wins.
I think we need to stop lying to people about the possibility of “catching up” if you get a late start saving for retirement. I’m sorry if it disturbs someone in their 50s that they’re not going to be able to avoid a sharp drop in their lifestyle in retirement, but we need to get the message out to younger people while there’s still time to do something about it.
Excellent article. Now I really regret taking $8K out of my Roth IRA for that unfinished doctoral degree in 2004, when I could have just borrowed money. I had started saving when I was 18. But I’ve been a strong saver ever since and now I evangelize the gospel of “early and often” retirement savings!