Saving for retirement is crucial because most people don’t have a pension, and Social Security replaces only 40% of pre-retirement income. Since I know how important it is to save for my future, I’ve set aggressive savings goals and I’m working on building a big nest egg that will help me retire at a reasonable age.
Unfortunately, accomplishing my goals will be a little harder than it had to be. That’s because I made a retirement mistake early on that I’m still paying for today.
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The big retirement savings mistake happened when I was in my 20s. Specifically, when I started working, I was focused on things like paying off my student loans and saving for a house.
As a result, I put off investing as much as I should have in my retirement plans. In my first couple of jobs, I invested either nothing at all or just enough to get the company’s 401(k) match.
Unfortunately, I hadn’t actually taken the time to consider when I wanted to retire, how much money I would need, or what my goals would be, so I had no idea how much I actually should be putting into my retirement plans. I also didn’t really consider whether I should be investing in a 401(k) or looking into a traditional or Roth IRA, so I was not effectively working to set myself up for financial security.
Unfortunately, because I was late in getting started investing, I lost a good number of years when I left returns I should have been earning on the table. And this affected the amount of compound growth I can benefit from.
When you start investing, your money (ideally) earns returns that can go back into your account and be used to buy more assets. Since your principal balance grows when these returns are reinvested, you now have a larger pot of money that is working for you. So, even if your investments perform the same the next year, you’ll still earn higher returns because you have more money invested.
The sooner you start investing, the more compound growth works for you because you have more years of returns that can be reinvested. This has a snowball effect over time, making it much easier to increase your nest egg while investing less yourself.
Since I started late, I’ll now have to put more money in each month because I don’t have as many years of compounding that can grow my balance without the cash coming from my pocket.