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When it comes to saving for retirement, time is of the essence.
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.
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.
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.
Find out with My Retirement Plan, an online tool that makes it easy to see if you are on track. After you answer a few questions, My Retirement Plan will calculate your retirement savings goal and recommend personalized next steps.
This article has been prepared for informational purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. The accuracy and completeness of this information is not guaranteed and is subject to change. Since each investor's situation is unique, you should review your specific investment objectives, risk tolerance and liquidity needs with your financial professional to help determine an appropriate investment strategy. Also, since Wells Fargo Advisors does not provide tax or legal advice, investors need to consult with their own tax and legal advisors before taking any action that may have tax or legal consequences.
Investment products and services are offered through Wells Fargo Advisors. Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC (WFCS) and Wells Fargo Advisors Financial Network, LLC, Members SIPC, separate registered broker-dealers and non-bank affiliates of Wells Fargo & Company.
Retirement Professionals are registered representatives of and offer brokerage products through Wells Fargo Clearing Services, LLC (WFCS). Discussions with Retirement Professionals may lead to a referral to affiliates including Wells Fargo Bank, N.A. WFCS and its associates may receive a financial or other benefit for this referral. Wells Fargo Bank, N.A. is a banking affiliate of Wells Fargo & Company.
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