Investing: The Benefits of Starting Young

Over the past few weeks I have had the opportunity to meet with a number of people who are recent college graduates just starting their careers.  Boy, has the world changed a little bit since I graduated!  The first thing I noticed is that starting salaries today are what managers’ salaries were when I was starting my career.  And, as my kids would tell you, back when I graduated from college I still had to feed my pet dinosaur on my way to work.  Is it wrong to occasionally want to sell your kids on EBay?   Back to the point.

As a number crunching financial geek, I totally understand that compound interest works exceptionally well the longer the time period, but I vaguely recall seeing examples about how much it pays to save early.  During the course of a meeting with a 23 year old new-hire, I went online and found this blog, Start Investing Today: An Amazing Comparison of 25 vs 35 Year Old Starters, from Darwin’s Finance.  It shows what happens when a 25 year old invests $5,000 per year until age 35 and then stops (10 years, $55,000 total invested) vs. a 35 year old who invests $5,000 per year until age 60 ($130,000 invested).   The net result still surprises me almost every time I look at it, and I’ve seen the results A LOT.  Assuming a constant 8% rate of return, the person who starts at age 25 reaches age 60 with a balance of ~$615,000 and the 35 year old who invests more than twice as much ends up at age 60 with ~$432,000.  That’s a HUGE difference, nearly $200,000.  I shouldn’t be surprised by this result, yet I am every time I re-run the numbers.

For those who are early in their careers, I will make it a point to share this and do everything I can to encourage them to participate in their 401(k) plans, open a Roth IRA, or simply save every dollar possible.  The only negative I can find in these numbers is this:  Showing this to a friend who is 40+ and has recently gone through a divorce and is starting all over again – the numbers depressed him.  The good news is that even for the 40+ crowd (of which I’m a member), there is still time to save a substantial amount of money for retirement.  I think I just found a topic for a future blog entry.

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