These Numbers Will Convince Your Teen to Start Saving for Retirement
It’s never too late to start saving for retirement, but anyone who starts early is sure to reap a huge advantage. The reason for this is compound interest, which we will discuss below. If you’ve been waiting to invest in your retirement until you tick off other financial goals (cough, student loans ), let’s see why you should consider putting at least some savings aside. And if you have a teenager who rolls his eyes at the thought of saving part of his first paycheck for his distant retirement, here’s how you can explain to him why it’s important to start saving money as early as possible.
Why is it important to save early?
Simply put, compound interest means that the interest on an investment grows exponentially, rather than linearly, over time. What this means for a retirement account like a 401(k) or Roth IRA is that every little contribution you make makes a big difference, especially when compared to a traditional savings account. The bottom line is that with compound interest, how early you start saving usually outweighs the size of your investment. Even investments that have remained untouched for decades can continue to grow.
Let’s look at some specific scenarios that show how compound interest works for you. They all assume a moderate 6% annualized return on investment in pension funds , which is roughly what most ROI calculators automatically set to.
- Scenario 1: You save $30,000 over 20 years but started at 35. You stop contributing at age 55. When you retire at age 65, you will have about $53,725 thanks to an additional 10 years of compound interest. which allowed your funds to grow even without you touching them.
- Scenario 2: You save $30,000 over 20 years but started at 25. You stop contributing at 45. When you retire at age 65, you will have about $96,214 thanks to an additional 20 years of compound interest. which allowed your funds to grow even without you touching them.
- Scenario 3: You saved $30,000 in 20 years but started at 15 . You stop contributing at the age of 35. When you retire at age 65, you will have about $172,305 thanks to an additional 30 years of compound interest that has allowed your funds to grow even if you haven’t touched them.
Of course, in the best case, you will start saving as early as possible and never stop investing. But the scenarios above demonstrate just how important time is and how any savings—even if left untouched for years—can make a big difference.
To calculate the numbers yourself, Investor.gov has a calculator that lets you test different savings scenarios that are appropriate for your financial situation.
bottom line
Encourage your teens and young children to contribute to a Roth IRA or 401(k) from the very first paycheck and they will thank you later as they see the numbers go up and up. And remember that no matter your age, you can still take advantage of compound interest, even with a small initial investment. The important thing is that you start saving and investing as soon as possible. Check out our guide on how much you should have saved at each age .