Key Points
I began saving for retirement when I was 20 -- giving me an early start on my goals.
These early contributions will remain invested for several decades before I have to use them.
This means I can save less each month and still reach my retirement goal.
- The $23,760 Social Security bonus most retirees completely overlook ›
Mistakes are a natural part of retirement planning. Maybe you save in the wrong type of account and miss key tax advantages, or you forget to claim your 401(k) match, forcing you to save more on your own. Those mistakes are frustrating, but they're often not disastrous.
You can usually make up for them with a few careful choices. There's one thing in particular that I did years ago that more than makes up for some of the smaller retirement planning mistakes I've made along the way.
Will AI create the world's first trillionaire? Our team just released a report on the one little-known company, called an "Indispensable Monopoly" providing the critical technology Nvidia and Intel both need. Continue »
Image source: Getty Images.
Starting early makes reaching your savings goals much easier
I began saving for retirement at 20, and while I wasn't contributing a ton of money at that time, those earliest contributions will likely prove to be some of my most valuable. They'll remain invested the longest, which means they'll probably appreciate the most over time.
It might not seem like a few years will make that much difference, but it matters more than you'd think. Consider $1,000 invested for 40 years with an 8% average annual return. It would be worth about $21,725. After being invested for 41 years, that $1,000 investment would be worth about $23,462 -- over $1,700 more.
Obviously, if you set aside more money, your retirement savings will grow even faster. You'll usually have to invest far less of your own money to retire comfortably when you start early than you would if you'd waited until later in life.
Say you wanted to retire with $1 million in savings. If you earned an 8% average annual return and you planned to retire at 65, you could reach your goal by saving just $322 per month if you start at age 25. Wait until age 30 to start, and you now have to save $484 per month to reach the same $1 million target.
Contribute what you can, even if it's small
The main reason most people don't begin saving for retirement early is that they cannot afford to do so. They have too many bills right now and are trying to save for more immediate goals, like buying a home or a car.
This is understandable, but if you can spare even $5 or $10 per pay period, it's worth doing so. This builds the habit of making regular contributions, and it gives you a chance to start putting your money to work for you.
As your income grows and you have more cash to spare, you can increase your retirement contributions. Always remember to do this after you get a raise, and consider saving some of your tax refunds or year-end bonuses if you can afford it. The farther you are from retirement, the more this money will likely be worth by the time you get there.
The $23,760 Social Security bonus most retirees completely overlook
If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income.
One easy trick could pay you as much as $23,760 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Join Stock Advisor to learn more about these strategies.
View the "Social Security secrets" »
The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
