The Importance of Starting Early

Making the resolution to start invest responsibly is difficult. Starting to invest period seems to be even more difficult. It is so easy to put off, yet the longer you wait, the more difficult it becomes, thanks to the miracle of compounding. For example, if one were to start contributing $4,000 to an IRA at age 22 until age 30 for a total of eight years, letting the balance compound until retirement, they would have as much money as someone who starts at age 30 and contributes the full 35 years until retirement. If you wait until age 40, you will have half as much as the other two scenarios at the standard retirement age of 65. This assumes historical rates of return of 8 percent.

Ah... but you say, "I'm going to get 12 percent returns". Well, in that case, the one who started early would have twice the money than the one who started at thirty, and an amazing six times the one who started at age 40. That's assuming that one can maintain 12 percent returns over many decades, which very few (even the highly paid mutual fund managers) get that.

The only way to make up the gap is to sock away much more than the maximum. Using the above scenarios, the 40-year-old would need to sock away $9,000 per year just to have the same amount as the 22-year-old.

Faced with these unpleasant choices, procrastinators are prone to making two wrong choices. The first mistake is assuming they will -- ney, must -- make substantially better than average returns. However, this almost always entails taking on more risk. Many lose more than they can afford, and end up worse off than before, with less money and less time. The second mistake is burying one's head in the sand, and hoping the problem goes away. For today's 40-year-olds, this action can have tragic consequences. The chances that Medicare and social security will exist in their current form decrease with every year that our politicians play ostrich.

As painful as the decision may be, and as much as you might hate dealing with it, starting early and starting now is the easiest choice. The problem does not get better with age.