Saving for the future: start now or later?

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There are many ways to reach a future goal. You can save now, or you can save later (or perhaps both). But there is an advantage to putting your savings and earnings to work for you as early as possible.

Compound savings
If you have $1,000 now and invest it at an assumed 6% annual rate of return, in 1 year you would have $1,060, in 2 years about $1,124, and in 10 years about $1,791. Your earnings compound as you earn returns on your money.

Compounding at work
For example, let’s say you start saving now. You put $5,000 at the beginning of each year in years 1 to 20 into an investment that earns a hypothetical 6% annually. In 30 years, you will have accumulated about $349,150.

Alternately, let’s say you start 10 years later. You save $5,000 at the beginning of each year in years 11 to 30. Once again, you earn an assumed 6% annually. In 30 years, you will have accumulated about $183,928.

In each of these examples, you’ve set aside a total of $100,000. However, by starting now, you accumulate about $165,222 more than if you start later, and all of that is from earnings. By starting now, rather than putting it off, you have put your money and the power of compound earnings to work for you.

Now let’s look at a different situation. Let’s say you would like to start later but accumulate the same amount as if you had started putting money aside now. In this case, you would need to save more, about $8,954 at the beginning of each year in years 11 to 30, in order to accumulate $349,150 after 30 years.

In this example, you would need to save a total of about $179,085. That’s $79,085 more than if you had started earlier, when compounding could have helped make up that difference. To put it simply, compound earnings don’t have as much time to work for you when you postpone getting started.

Strike a balance
Of course, you could accumulate even more if you do both. For example, if you set aside and invest $5,000 at the beginning of each year in years 1 to 30 and earn an assumed 6% annually, in 30 years, you will have accumulated about $419,008. This is substantially greater than the $183,928 accumulated if you invest $5,000 in years 11 to 30, while somewhat greater than the $349,150 accumulated if you invest $5,000 in years 1 to 20.

If you can’t afford to set aside $5,000 right now, consider investing $3,000 this year, and increasing that amount by 3% to $3,090 next year, and continuing to increase the amount set aside by 3% each year. If that money earns an assumed 6% annually, you will have accumulated about $351,520 in 30 years, slightly more than the $349,150 accumulated if you save $5,000 each year in years 1 to 20.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2016.

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