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Need a great reason to save for retirement while you’re young and broke? We have a reason worth about $831,751 for you!
Wanna know how you can have an extra $831,751 saved for retirement? Wanna know how you can make sure your retirement money doesn’t run out no matter how long you live?
Well then, friend, settle in for a short story about two women: we’re going to call them Aurora and Maleficent.
Aurora and Maleficent are both doing exactly what the financial experts recommend, each saving the current government-allowed maximum $5,500/year ($458.33/month) in their IRA Retirement Accounts (sound like too much money for anyone to save? Check out our doable savings plan). Their accounts have the exact same investments, so they’re earning the same 7% average interest rate, and both women have been angels about not touching the money until retirement.
When they retire at 65 years old, Maleficent has a cute little $371,280 nest egg. Aurora, on the other hand, MORE THAN TRIPLED Maleficent’s, growing to a whopping $1,203,031. What?!
The Difference Between Aurora and Maleficent
So how do we save for retirement like Aurora? Here’s the difference: Aurora started saving at 25 years old, long before any of her friends were even thinking about retirement savings (frick, at that age no one could even afford non-IKEA furniture, let alone think how exactly to save for retirement!), and Maleficent, like most people, started saving at 40 when she could see retirement on the distant horizon. That single decision made an $831,751 difference!
That’s not even the craziest part. The craziest part is that Aurora only had to save $82,500 more than Maleficent. Bear with me. Aurora saved $220,000 ($5,500/year for 40 years), and Maleficent saved $137,500 ($5,500/year for 25 years). But somehow Aurora’s $82,500 extra savings resulted in $831,751 more at retirement!
Our last post talked about the dangers of interest and how to avoid paying a ton of interest on your debts, but this post is about using interest to your advantage. Specifically, this post is about the magic of earning compound interest to save for retirement.
What is Compound Interest and Why Should I Care?
Compound interest just means that the interest you earn on your savings earns its own interest, so it grows exponentially. The more time you give it, the more it’s going to grow your savings. But it’s also going to grow them faster and faster the longer you save. It’s like a fine wine getting better and better with age! Just check out the savings graphs for Maleficent and Aurora.
Notice Aurora’s Account Total Line skyrocket as time goes by!
Let’s also look at the savings plans for Aurora and Maleficent. You don’t need to go through line by line, but notice that when Aurora retires and stops contributing to her retirement fund, she’s making $80,901/year IN INTEREST! That’s like a salary and a half for most people! She can live off that interest alone and never have to worry about covering living expenses no matter how old she lives to be. Compare that to Maleficent’s $24,827/year interest at retirement.
This is the difference between having a retirement of travel and dining out and enjoying your hobbies compared to a retirement of staying in and watching whatever the 2050 version of Netflix is because you can’t afford to go out. Who would you rather be?
Compound interest is the reason we need to be thinking about retirement savings long before we’re thinking about retirement. In fact, ideally, we’re thinking about retirement savings before we even have a solid career. Why didn’t anyone tell us this in high school?!
Now don’t panic if you’re over 25. The point is you need to start saving TODAY to secure the best possible future for yourself.
Want to run your numbers and see how much you can save for retirement if you start now? We have a totally free, super fancy calculator for you! You just enter your monthly savings and time until retirement into our Excel calculator, and it spits out your estimated retirement savings totals!
How Do I Save for Retirement?
Ready to tackle a holistic savings plan to cover emergencies, retirement, and financing your dreams? We’ll show you how in The 3 Accounts You Need to Grow Your Savings.
Just want to read more on how to save for retirement? Check out 3 Easy Steps to the Retirement of Your Dreams!
Feel like sharing?
Post your potential compound interest savings in the comments!