Now that we’re well into autumn, the days are getting noticeably shorter. The change in seasons reminds us that time is passing – and it’s important to use that time wisely. When used well, in fact, time can be your greatest gift in many walks of life – and that’s certainly true when you invest.
To illustrate the importance of time, let’s look at a scenario. Suppose you start saving for retirement when you are 25. If you invest $3,000 per year in a tax-deferred vehicle, such as a traditional IRA, and you hypothetically earn a 7% annual return, you will have accumulated more than $640,000 after 40 years, when you reach 65 and are ready to retire. (Keep in mind that you will be taxed on withdrawals.)
Now, though, suppose you wait until you’re 55 before you start saving seriously for retirement. If you put that same $3,000 per year in that same IRA, earning that same hypothetical 7% return, you’d only end up with slightly more than $44,000 after 10 years, when you reach 65. And to accumulate the $640,000 you would have gotten after 40 years by contributing just $3,000 per year, you would have had to put in about $43,500 per year for the 10 years between ages 55 and 65.
