If you would rather spend your lunch break researching summer vacation destinations than IRA options, you aren’t alone.
A new survey from financial services firm Edward Jones asked which aspects of the future Americans spent the most time planning: vacations, retirement, higher education, or big purchases such as a new car or home.
Out of over 1,000 adults, 28% admitted that they spend the most time planning for vacations — more than for retirement (25%), which makes perfect logical sense if you’re thinking in terms of “things that are fun and soon” versus “things that are necessary and far away,” but no sense whatsoever when you take into account one important fact:
The earlier you start saving for retirement, the better.
The data indicated that each subsequent age group spent more time thinking about planning for retirement as it loomed closer on the horizon (only 9% of people ages 18-34 prioritised retirement plans, increasing all the way to 40% of people ages 55-64), but everyone would likely have been better served devoting some of that time spent Googling “affordable beach vacation” in their 20s to considering whether they could use a Roth IRA.
Due to the power of compound interest, the longer you wait to save for retirement, the more money you’ll ultimately have to contribute overall to achieve the same level of savings. For instance, a 25-year-old who starts saving $US499 a month at a 6% rate of return will end up with the same savings as a 50-year-old who starts saving a whopping $US3,421 a month when they both hit age 65: $US1 million. (You can see this example illustrated in chart form.)
While it’s entirely possible that some of the Edward Jones respondents had extenuating circumstances like financial trouble that delayed the starting date of their savings, it’s also likely that some of them fell prey to an illusion of urgency: As retirement gets closer, it feels more important.
But the truth is that retirement, a huge financial project, becomes important the minute you enter — and consider exiting — the working world. Even as people delay retiring, that final life stage may very well span 30 years. Some experts estimate that even $1 million in savings isn’t enough.
If nothing else, you should urgently want to keep yourself out of a situation where you have to contribute $US3,421 a month.
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