Wednesday, April 15, 2015

Saving for Retirement ... Start Early ... Internalize the Rule of 72 at an Early Age

We all know that time lost is gone forever, the early bird gets the worm, that tomorrow is never just 24 hours later than today, and so forth.

And so it is true with saving and investing properly for our retirement years as well. Never put off until tomorrow that which should be done today.

In other words, our future self is depending upon our present self to 'take care of business' now so the future can be enjoyed thoroughly and without experiencing unnecessary and completely avoidable financial worries.

Delaying retirement saving can cost you --- a lot tells the present versus future story in a straightforward manner:

"When it comes to saving for retirement, let’s face it: Procrastination isn’t unusual.
Now, a new study quantifies just how pervasive — and costly — such behavior can be.

According to a survey . . . , 68% of adults ages 55 and older admit to having gotten a late start on their retirement savings.

While, on average, the 968 respondents said 25 was the right age at which to start saving for retirement, they report having taken action 10.6 years later, at 35. Reasons for the delays include the usual suspects: Other priorities (40%), confusion over how to get started (23%), and difficulties setting aside the money (20%).

What’s the big deal about delaying? It turns out that making up for lost time isn’t easy. In fact, . . . someone who saves 6% of a $36,000 salary (that grows by 1.5% a year) starting at age 25 will have close to $500,000 by age 65, assuming a 3% employer matching contribution and a 5% annual return. But to reach the same target, someone who starts saving at 35 has to contribute 12% a year. For someone who starts at 40, the magic number is 16.5%. . . .

The reason why, of course, comes down to one word: Compounding."

Summing Up

The power of compounding is real indeed. The 'magical' rule of 72 needs to be taught and understood at an early age. The rule is that a double of any amount invested takes place each time the number of years invested times the average annual rate of return on the amount invested equals 72. {For example, 9X8, 12X6, 18X4 all equal 72. Thus, 9 years at 8% or 8 years at 9% means 1 grows to 2.}

And our schools are failing big time by not teaching the rule of 72 to the young. The simple fact is that beginning to save and invest early -- not borrow -- is an absolute winning approach to later individual financial security and happiness.

The 'magical' rule of 72 makes that last double a real biggie when the process is begun at age 20 and not age 30. How big? 

Well, one dollar which grows 7% annually will double ~5 times between age 20 and age 70. That's the simple rule of 72 working for the early saver and investor. $1 becomes $2 at age 30, $4 at age 40, $8 at age 50, $16 at age 60 and $32 at age 70.

That same dollar invested at age 30 grows to $16. Thus, $1 will likely become $16 or $32, depending solely on when it's invested.

The math is simple. Becoming knowledgeable about the 'magical' Rule of 72 and then developing the habit of saving and investing early in life is what needs our immediate attention.

That's my take.

Thanks. Bob.

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