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Aha! Why It’s So Important to Get an Early Start on Retirement Saving – The Wall Street Journal
An adviser uses this chart to show how much more workers will need to save each month if they procrastinate on getting started
By Anne Tergesen
April 27, 2016 2:27 PM ET
This is an occasional feature in which an adviser shares a chart or other visual presentation that he or she finds valuable to help clients grasp an aspect of personal finance or investing.
The adviser: Matthew Papazian, founding partner of Cardan Capital Partners LLC in Denver.
The chart: The bars in the chart show the amount of money someone who starts saving at various ages would have to set aside each month to amass a $1 million nest egg at age 65. The illustration doesn’t factor in taxes and it assumes a 6.5% annual return.
The reason it is useful: Mr. Papazian uses the visual to motivate young investors, many of whom save little to nothing. The goal, he says, is to “drive home the point that while it is very easy to become a millionaire if you start saving and investing in your 20s, it becomes almost an insurmountable task if you wait.”
To reach that $1 million target, someone who starts saving at age 20 would need to save $310 a month, while someone who starts at 30 would need to set aside more than twice that monthly amount, or $625. The price of procrastination rises to $1,335 a month for someone who starts saving for retirement at 40 and to $3,294 a month when starting at 50, the chart shows.
Mr. Papazian says young investors have a hard time visualizing retirement, since it is decades away. Living on entry-level salaries, many spend every dime they earn—a dangerous habit given that “it’s very easy to get used to spending what you make.” Some young workers believe they will eventually reap a windfall—in the form of an inheritance or a startup success—that will bail out their retirement nest egg.
Mr. Papazian says the numbers illustrate the famous quote ascribed to Albert Einstein deeming compound interest “the eighth wonder of the world”—in a way that a lecture from a parent never could.
The adviser says the figures recently had the desired effect on two adult children of a client. Recent college graduates with jobs, neither was saving for retirement, causing their father—a successful entrepreneur—concern. After meeting with Mr. Papazian, both started contributing to their company 401(k) plans. “Whether they will continue is another story, but they both did act on it,” he says.
For those expecting a windfall, Mr. Papazian positions saving early as similar to buying an insurance policy. By saving a little each month starting at a young age, he tells them, “you will end up OK even if the inheritance or IPO doesn’t work out.”
Write to Anne Tergesen at firstname.lastname@example.org