So you’ve just started saving and retirement planning may not be on your radar yet. But one of the keys to a successful retirement is to start accumulating as early as possible. That’s because time is one of the most powerful elements in your investment plan.
Compounding is the ability to generate earnings from your investments, and then earn more money on those reinvested earnings. At first, compounding seems to have little effect on your wealth. But over time, it has a powerful multiplying effect.
For example, let’s consider two people who start investing at different ages. Janet starts early and saves $50 every two weeks from the age of 25 until her retirement at age 65. Mark starts setting aside $100 every two weeks at age 40 and continues until his retirement at age 65. They both earn 6% per year on their money. As Figure 1 shows, time clearly matters. Although Mark invested more overall, he accumulated less than Janet.
The above example is for illustrative purposes only and not indicative of any investment. Account value in this example assumes a 6% annual return. Source: RBC Global Asset Management Inc.
As you can see, it’s best to start saving as early as you can. Even $100 a month earning 6% per year grows to about $15,000 over 10 years, $45,000 over 20 years, and almost $70,000 over 25 years.
For a real world example, check out our investment performance snapshot and see the impact monthly contributions and reinvested distributions would have historically had on a portfolio’s growth.
|Monthly contribution amount|
|Number of years invested||$50||$100||$250||$500|
The above example is for illustrative purposes only and not indicative of any investment. Account value in this example assumes a 5% annual return. Source: RBC Global Asset Management Inc.
If you haven’t already started saving for retirement, the best time to start is now. Here are some ways to start putting your money to work today.
Set up a pre-authorized savings plan
This is easy to do and makes saving automatic and effortless. You can start with as little as $25 a month, which may not seem like a lot, but you’ll be amazed how small contributions can add up and grow over time.
Give yourself a “retirement raise”
Whenever you get a bump in pay, reward your future self by increasing the amount that you regularly add to your retirement accounts. Over time, the difference can be significant.
A financial advisor can help you establish a plan and get you started on the right track.