When Is $30K Worth $90K? When You Save It In Your 20s

Recent college graduates who score their first job might be tempted to splurge on a new car or an apartment that's a little out of their price range. But 20-somethings are in an incredibly unique position to set up their financial future, if only they could teach themselves to think backward about retirement savings .

It sounds like a math trick, but it's really just harnessing the power of time: Someone who saves for retirement during their 20s and completely stops a decade later will have more at age 62 than someone who starts saving in their 30s and spends the rest of his or her adult life trying to catch up. Yes, 10 years of savings can be worth more than 30 years of savings. This may be the only time when something that sounds too good to be true really is true.

If you know someone who's recently graduated or started a first job, sit them down and show them what personal finance advisers call "The Parable of the Twins."

Liz Weston, in her book Deal with Your Debt, offers this simple illustration. One twin puts aside $3,000 every year in a Roth IRA starting at age 22, and stops at 32. She never adds another penny. Her brother starts saving $3,000 annually at 32, and continues until age 62. Who has a larger retirement kitty?

Assuming an average 8 percent return annually, the twin sister wins rather handily. She has $437,320, compared to her brother's $339,850, even though she contributed two-thirds less of her own money than her brother ($30,000 vs. $90,000).

Of course, different assumed returns would change the grand total, but lower or higher rates don't change the fundamental principal: Dollars saved in your 20s are worth a lot more than dollars saved later in life.

"It's counterintuitive for people to open up their time horizons, but the difference it makes is incredible," Weston said. "We focus on our immediate past and present at the expense of the future."

And that can get pretty expensive. Thanks to compounding returns, every $1,000 that someone in their 20s doesn't save costs them more than $10,000 at retirement.

"You rob the money of time to earn returns, and time for those returns to earn returns," she said. "If you put it off, it gets increasingly hard to catch up."

Source:  Bob Sullivan, NBC News

The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 

 The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida.