July 20, 2012 (PLANSPONSOR.com) - Those who start saving for retirement in their 20s can make nearly double what an investor beginning in their 30s can, because of compounding, research suggests.
Vanguard found that a participant who starts saving for retirement at age 25, based on $1,000 in annual contributions for 30 years with a 6% return, is estimated to have an account balance of $83,802 by age 55 and $150,076 by age 65. A participant who does not start saving until age 35, on the other hand, could contribute at the same rate but not save $83,802 until age 65.
Maria Bruno, senior investment analyst for Vanguard Investment Counseling and Research, said during a webinar that young investors’ challenge is increasing savings early. The power of compounding—or generating earnings from previous earnings—is important to young people, she said.
According to Bruno, although a 3% retirement savings deferral rate is common, it is too low. Twelve to 15% is a more optimal deferral rate for investors. “That can be a lofty goal,” she acknowledged, but she advised investors to start where they can and use automatic escalation if possible.
It is important to implement investment education early, she said. For example, parents can start a college savings fund and show their children how the money accumulates over time. In college, finance classes can make young people more aware of the importance of saving.