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.
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.
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.
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.
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.
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