We are officially on retirement. You might be thinking that if this is a podcast for the young adult then why am I talking about retirement? Well, it’s never too early to talk about retirement! The younger you start the better off you will be when you hit retirement age.
If you remember my episode on Compound interest then you might remember how powerful compound interest is when it comes to retirement. Retirement is an extension of savings that you don’t touch until you are of retirement age. Saving your money at a younger age allows your money to grow and compound on each other. It’s a very important concept to understand.
I notice many people don’t talk about retirement until they are a few years away from it. At that point, people realize they didn’t save enough in their retirement accounts to really feel like they could live comfortably. I am many many years away from the traditional retirement age, but I realized the importance of retirement when I graduated from college and I started putting money into different retirement accounts right away! I’ll be going over all the different types of retirement accounts that you can have in later episodes, similar to what I did for the savings accounts.
I want to really show you the importance of thinking about retirement at whatever age you are at right now.
If you are 16 years old you can legally work. If you legally work you should start a retirement account. If you save $1,000 and you don’t add any more money to your account, you’ll have $35,151 at the age of 67 if we assume your annual return to be 7%. An annual return is a return you expect to get back on your investments over time. It is a percent. We will talk more about annual returns when we talk about investing, but we know from history that we can expect a certain amount of growth from our investments. I like to use 7% because that is a very conservative number. It could be higher, but 7% is very safe.
To get even more specific on our example, we see after the 1st year your $1,000 will grow to $1,072. The next year, you can estimate another 7% on the $1,072 which is $1,449. And the next year, another 7% on top of the $1,449 which will be $1,232. In those early years, you’ll see compound interest working for you, but at a bit of a slower rate. It really picks up when you are 51. At 51 you will have $11,506 and the next year your account will be at $12,338! Retirement is like a snowball, it gradually builds, but as it gets bigger you can expect the snowball to be huge at the bottom of the hill!
Now let me give you another example. Let’s use the same numbers as before. You are 16 and start a retirement account with $1,000. You only add $1,000 to your account every year until you are 67 years old and you can expect an annual return of 7% your account will grow to $521,056. That’s half a million!
Just by adding an additional $1,000 a year into your account, you can expect about $485,000 more in your account. This is where the power of compound interest comes into play.
I am 27 years old right now. If I want to make around $520,000 by the time I retire I need to put in $2,388 a year until I am 67 years old.
When you start younger, you can put less in and still get amazing returns. If you can put even more away you can expect an even greater return.
Let’s say you don’t think about retirement until you are 50 years old. If you want to retire at the age of 67 with $520,000 and you expect the same 7% return, you will have to save $834 a month or $10,008 a year! Every year you push back saving for retirement the more you will have to put away a year and the less compound interest works on your side.
When you start at the age of 16 you only have to put away $1,000 a year to get to half a million dollars. If you start at the age of 27, you need to save $2,388 a year. And if you start at age 50, then you need to save $10,008 a year. When you start younger you can put less away and get amazing returns because time is on your side. Your account has time to grow and really use the power of compound interest to your advantage. Think if you could put more than $1,000 a year away and what returns you would get!
Hopefully, you all see the importance of retirement and why starting at whatever age you are at is very important. Don’t stress if you didn’t start at 16 and are 18 or 20 now. Start today because starting today is better than waiting to start.
Next week I’ll talk about all the different types of retirement accounts that you can have and in the following weeks, I’ll dig deeper into each of those accounts so you can decide which account is the right one for you to open to reach your financial goals!
Thank you for listening to No Fear Finance. We are still hitting record numbers of listens and I want to thank you all so much for your support! If you want to show even more support please consider buying me or anyone on Amalfi a cup of coffee! There is a link in the show notes for you to do that. We’d appreciate it so much! You know a cup of coffee for me is really a bag of coffee grinds that can be shared with everyone at Amalfi!
Until then, have a great week and see you all on Monday!