Personal Finance Essentials

The Cost of Waiting: Why Starting Early Matters

One Year of Delay Costs You $70,000

Eight Years of Delay Costs You Nothing — If You Start at 18

Consider the story of a brother and sister. At age 18, he contributed $5,000 a year to an IRA for eight years and then stopped – a total investment of $40,000. His sister started at age 26 and contributed $5,000 a year for 40 consecutive years – a total of $200,000. Both earned a 10% annual return.

The result: she accumulated $2,212,963. He collected $2,587,899 – $374,936 more than she did – despite investing only one-fifth as much. Starting eight years earlier and saving for just eight years beat saving for 40 consecutive years. That is the power of compounding.

Suppose you are 30 years old.

If you contribute $5,000 a year for 35 years and earn 8% annually, your account will be worth $861,584 at age 65. But if you delay just one year and start at 31, your account will be $68,451 less. One year of delay costs nearly $70,000.

Workers who continued investing in their 401(k) plans throughout the decade ending December 31, 2012 saw the size of their accounts quadruple, even though the S&P 500 Stock Index rose only 62% during that same period. You can grow your wealth no matter what the economy is doing – but only if you stay invested.