When it comes to saving for retirement, time is of the essence. 

The power of time  

Why is time of the essence? The sooner you begin saving – even small amounts – the better your chance of reaching your retirement goals. This is due to the power of compounding interest. And, this can be even more powerful if you invest in a tax-advantaged account like an IRA or qualified employer sponsored retirement plan (QRP) such as a 401(k), 403(b) or governmental 457(b). Consider the following hypothetical example that shows how much waiting to invest can cost.

Start early to save more with less

Investor A invested $1,000 per year for 10 years, beginning at age 30. Investor B also invests $1,000 per year, but began at age 45 and did so for 20 years. Even though Investor A saved half as much as investor B, Investor A had more money at the time of retirement, all because of starting earlier and the power of compounding interest. Investor B will have to save more to catch up. This is the cost of waiting, a cost that quickly adds up. It doesn’t matter what age you are – more time is on your side if you start saving for retirement today.

Putting time on your side

Investor A contributes $1,000 per year for 10 years ($10,000) to an IRA beginning at age 30. Investor B contributes $1,000 per year for 20 years ($20,000) to an IRA beginning at age 45. See what kind of impact time had on each investor's retirement savings. 

The example is hypothetical and assumes a 6% annual fixed rate of return and annual compounding. The growth of the assets is before tax and when distributions are taken from the account a portion will be taxed at an ordinary income rate. The chart does not represent the returns of any particular investment and should be not be used to predict or project performance. There is no guarantee you will earn 6% on investments and your account value may fluctuate over time. It assumes all earnings are reinvested and does not include transaction costs, fees, or expenses associated with the account or any individual investment made in the account.

What you can do next

Use a savings calculator to see compounding in action and how little changes to your spending can have a big impact on how much you can save for retirement. Better yet, commit to increasing your ongoing contributions to your QRP as well as your IRA.