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Millennials are in an age of beginnings. They're starting their careers. They're buying their first homes. And they're stepping into parenthood. The last thing on their minds? Apparently, retirement.
In fact, just 38% of millennials currently contribute to a retirement account, according to a recent study conducted by TD Ameritrade on millennials and their relationships with money. There may be several factors that explain the low number. In addition to all of their new roles and responsibilities, millennials have record amounts of student loan debt, an average of $5,808 of credit card debt and little to no emergency savings. Up close, these burdens seem more pressing than retirement, which for most is still three-plus decades away. But unfortunately, delaying retirement savings and the power of compound interest could end up costing you a lot of money in the future.
What is compound interest?
Compound interest describes the snowball effect that takes place when your money accrues interest, and then that interest accrues interest, and so on.
Because of this exponential growth, if you start investing for retirement in your 20s, you stand to gain thousands of dollars more than someone who puts off saving until their 30s.
Here's an example of how compound interest can make your savings soar if you start saving and investing now.
Janna, James and Chris were all born in the same year and plan to retire at 65. Each can expect to see an average annual return on investment of 7%.
Janna started putting away $5,000 per year into a retirement fund when she was 25 and continued to do so for 10 years, investing $50,000 in total. James started saving the same amount at 35 and continued until retirement. In total, he invested $150,000. Like Janna, Chris started saving $5,000 per year at 25, but he continued to do so for 40 years. He invested a total of $200,000.
Although Janna invested $100,000 less than James, she will have nearly $78,000 more than him in retirement, simply because she started investing earlier. Despite investing only $50,000 more than James, Chris will have more than twice as much as him in retirement because he started saving early and continued to do so until he turned 65.
While this is a simple example, it clearly illustrates the power of compound interest and early investing.
Review your retirement expectations
If you're in your mid-20s and you've already started putting away a little money into a retirement account—you have every reason to be optimistic. If you aren't, you still have time to prepare for retirement. But you may need to double-check your retirement expectations.
Experts suggest you should have about two times your annual salary saved in a retirement fund by the time you reach 35.
But on average, millennials don't plan to begin saving for retirement until age 36, according to TD Ameritrade's study, which conducted a 15-minute online survey with 1,519 Americans aged 21 to 37. Worse, they plan to retire between the ages of 53 (men) and 56 (women). That's more than a decade earlier than the full retirement age set by the Social Security Administration.
Early retirement is possible—for individuals who make it a habit to live below their means, save more than they spend and invest that money early in life. But it likely won't be possible if you delay saving until a decade into your career.
"Don't wait to invest," said Chad Rixse, a financial adviser and co-founder of Millennial Wealth . "Get started as soon as you are able. The longer you use compound interest to your advantage, the more of a role it's going to play in your ability to retire."
This Article, What Millennials Need to Know About Retirement Investing , was originally published on ValuePenguin .
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
