Perhaps you're like me, 22 years old and excited about graduating from college and starting in the proverbial "real world". The prospect can be exciting and frightening at the same time, but also full of misconceptions. A recent article on FOXBusiness.com highlights "8 Misconceptions College Students Have About Money". These misconceptions run the gamut from fear over credit, seeing no need to budget and other general financial pitfalls. Yet, the worst misconception to me is the idea that there's "plenty of time to save."
While retirement may seem far away - 40+ years is likely for a worker just getting into the workforce - the day where you will begin to seriously consider it will come faster than you think. As a result, the planning and saving that we do today will affect both when we retire and how we retire. By that, I mean that how much money we have saved and invested will dictate the terms of our retirement - will we retire at 62, collect Social Security (if it's still around) and live comfortably off a lifetime of savings - or will we "retire" at 70, collect Social Security yet be forced to take a part-time job to cover rising living expenses? The former should be our goal, yet the latter is an unfortunate reality for many people.
By saving and investing more money early on, you will have less of a return differential to make up for as you get closer to retirement age. Ideally, your portfolio will grow and compound enough with the additional contributions that you make during your working years to negate the need for any makeup return as you get closer to retirement. The FOX article quotes a 2009 Vanguard report which states, "only 31% of employees under age 25 save for retirement, compared to 61% for those between 25 and 34.”
Those are harrowing statistics because it means that we are forgoing the best years of our life to save - when we have limited obligations such as a house payment or raising a family - and wasting precious time. Sure, a dollar today is worth more than a dollar in the future. However, a dollar today is not worth more than a dollar invested today for 40 years earning a 7% average annual return.