The Time Value of Money – You’re Never Too Young To Start Saving For Retirement

time value of money

It’s easy to ignore retirement; in your 20s and 30s it likely still seems an eternity away. As you move through your life, developing your career and growing as a person, retirement may drift to the very back of your mind, overlooked in the dynamism of your days and hours. This, to be blunt, is a mistake.

You’re never too young to start saving for retirement. In a perfect world, we’d all save for our retirements across the breadth of our working lives, from our first part-time job as a teenager up until the end of our careers. We’d plan consistently and constantly, adapt to changing circumstances, and engage in a judicious series of savings and investments aimed at securing a comfortable, active life in our golden years. Planning for retirement early on is about more than goal setting and responsibility—it has to do with how finances work and in particular the time value of money.

While the US Dollar is a fungible currency, overtime not all dollars are created equal. Due to the ongoing effects of various forms of inflation and interest, the value of the dollar changes over time, and the value of your savings and investments does likewise. CNN Money offers a great comparative example to make the point: Let’s say in one example you begin saving at age 25, putting away at least $3,000/year for 10 years in a tax-deferred retirement account. At the end of that 10 years, you stop investing completely. When you reach 65, your initial $30,000, growing at a 7% annual return, will have swollen to $338,000 even though you stopped investing at 35. By contrast, if you were to put off investing until age 35 and invest $3,000/year for 30 years, your $90,000 investment will only be worth $303,000 at the same 7% annual return.

This is the time value of money as applied to retirement planning. Growth of your assets is strongly grounded in the time they have to accrue, so understanding the role that interest and in particular compound interest plays in your investment strategy. Having a fully-developed yet flexible investment plan with retirement as the end goal is foundational to success overall. It’s easier to start planning, and building good investing and saving habits when you’re young and more flexible. This is where professional retirement planning comes in—by working with an expert in the field you can maximize your success by drawing on their experience and know-how in mapping your own path to retirement. While your individual retirement plan will depend on your own goals and circumstances, in general, such a plan should take the following into account:

  • Your present age
  • The age when you intend to retire
  • All sources of income, both current and projected
  • All expenses, both current and projected—don’t forget to leave room for a future spouse and children
  • How much you can afford to set aside for your retirement
  • How and where you plan to live after you retire
  • Any savings accounts you have or plan to have
  • Your health history and that of your family to determine health coverage later in life

This is far from a comprehensive list, but it’s a good set of concepts to start planning and building around. You’ll also likely want to think about the level of risk you’re willing to assume while investing. Some forms of retirement investment are relatively safe; savings accounts and IRAs are good examples. Investing in the market via a stock portfolio is potentially much more lucrative but it carries a correspondingly greater risk. It’s something to discuss with your retirement planning advisor—they’ll help walk you through the various options, see how they jibe with our overall goals and find the right solution for you and your family.

Planning for retirement shouldn’t be scary or daunting. It’s just part of a healthy and well balanced financial life, adding to your sense of security as you move forward. With the right guidance to help illuminate the blind spots, you’ll be well on your way to a successful retirement right out of the gate.