The Benefits of Saving Early for Retirement

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About the Author

dallin cutler

Dallin Cutler, CFP®

Vice President/Partner
Salt Lake City, Utah

 

No matter your age, it’s never too early to start saving for retirement. I say this knowing full well that worrying about how things will look for you financially when you stop working may not seem like a top priority at this point. After all, retirement could be decades away for you, and you may have student loans or other debts to pay off. However, though it’s not always easy, being disciplined about saving now will allow you to reap the financial rewards down the line.

Below are five compelling reasons why saving early for retirement is the best way to ensure your golden years are lucrative and stress-free.

 

Compound Interest

The earlier you start saving, the more time your money has to grow through compound interest. There’s no better example of this than billionaire investor Warren Buffett, the "Oracle of Omaha." As CEO of Berkshire Hathaway, Buffet has long encouraged individuals to start saving and investing early in order to take advantage of the power of compound interest. In one of his annual letters to Berkshire Hathaway shareholders, he famously wrote, "Someone's sitting in the shade today because someone planted a tree a long time ago."

To give another example, in Morgan Housel’s book “The Psychology of Money,” Housel writes that $81.5 billion of Warren Buffett's $84.5 billion net worth came after his 65th birthday. This staggering statistic shows that, as masterful an investor as Buffet is, his true weapon is simply time.

 

A Longer Time Horizon

The longer your savings have to grow, the more time you have to weather market fluctuations and potentially recoup any losses. Jim Simons, the manager of Renaissance Technologies and a successful hedge fund manager, is also a strong advocate for saving and investing early for retirement. He’s said that people should start saving for retirement as soon as possible. He has also emphasized the importance of staying invested for the long term and avoiding the temptation to make impulsive investment decisions based on short-term market movements.

 

Lower Lifetime Savings Need

The earlier you start saving, the less you'll need to save overall, since you'll have more time to reach your goals.

To illustrate this point, Jim Simons has some of the best returns of any investor in history, averaging about 66% annually. Warren Buffett, on the other hand, only has returns of about 22%. But Simon's net worth is $21 billion, where Warren Buffet's is $85.5 billion. Why? Jim Simons didn't start investing seriously until he was age 50, whereas Buffett started investing when he was in his teens.

 

Saving vs. Paying Off Debts

A common question that many clients ask when it comes to managing their money is whether they should concentrate on paying off their debts first or investing right away. There is no universal answer to this question. The right choice ultimately boils down to a couple of key issues. The first is more subjective and changes from individual to individual: how do you feel about your debt, and how badly do you want to get it paid off?

The second and more practical issue is the rate of interest that you are paying on that debt. If the debt you carry is charging you more than six or seven percent per year, then you’re probably better off paying off your debt than investing.

To conclude, saving early for retirement can set you on a path to a more secure financial future and help your ability to enjoy your retirement years. To discuss your retirement planning options, contact a financial planner at EP Wealth Advisors. Or click here for more financial education resources.

 

 

Disclosures:

EP Wealth Advisors, LLC (“EP Wealth”) makes no representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information presented in this report. EP Wealth has used its best efforts to verify the data included in this report. The information presented was obtained from sources deemed to be reliable. However, EP Wealth cannot guarantee the accuracy or completeness of the information offered. All expressions of opinion are subject to change without notice.

  • The content of this report is believed to be accurate as of the date of publication and cannot and does not accurately forecast future economic, market, or financial conditions; including changes to retirement benefits, social security, and/ or Medicare. For this reason, any subsequent changes, and/or that occur after the publication of this presentation may cause the analysis encompassed herein to become inaccurate. Any references to future market or economic forecasts are based on hypothetical assumptions that may never come to pass.

  • The information presented here is not intended to be regarded as a comprehensive list of considerations, including but not limited to, categories, services, or qualifications that a client or prospective client should consider when assessing or comparing Financial Advisors and/or Firms. As the author of this piece, EP Wealth Advisors, LLC (“EPWA”) has tailored the messaging of this article to align with the categories, services, qualifications, capabilities and services that it offers. There is no guarantee or warrantee that the services offered by EPWA will satisfy your financial services requirements. Services offered by other advisors may be more suitable to your specific needs.

  • There is no guarantee nor is the intention of this publication to establish any sense of assurance, that, if followed, the strategies referenced here will produce a positive or desired outcome. In fact, there is no guarantee that any of the steps detailed will enable the ability to generate successful or appropriate strategy or approach. The intent of this article is strictly for educational purposes.

  • The need for a financial advisor or financial planner and/or the type of services required are specific to the uniqueness of each individual’s circumstances. The referenced material identified herein is limited in nature and specific to what is offered by EPWA. There is no guarantee or warrantee that the services offered by EPWA will satisfy your financial services requirements. Services offered by other advisors may be more suitable to your specific needs.

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