Open up a tax-deferred IRA at age 25 and put in $200 a month, with interest you'll earn $700,000 by age 65. Wait 10 years to start and you'll only have $300,000. That's the miracle of compound interest.
One of the best things about being young is that, when it comes to saving for retirement, time is on your side. Granted, it may be hard to think about saving for an event that’s decades in the future and even harder to save for it, but simple mathematics show that the earlier you start creating a retirement nest egg, the better off you’ll be when it’s time to leave the work force.
Take this example: You open up a tax-deferred IRA at age 25 and put in $200 a month, earning an average of 8% a year. When you decide to retire at age 65, you’ll have close to $700,000 to live on. But suppose you wait 10 years before starting to save. You put the same $2,000 a year into the pot and earn the same average of 8% a year, but when you reach age 65, your nest egg is just under $300,000 — less than half of what you would have had if had started 10 years earlier.
That’s what financial advisors call the miracle of compound interest and it can work in even more surprising ways. Say, for example, that after you start saving at age 25, you decide, after 10 years, that you can’t afford to keep saving. A colleague starts his/her saving plan at the same time you quit. Assuming that your colleague saves the same monthly amount that you did and earns the same interest rate, at retirement age you are still likely to have more money in your retirement fund, even without adding to it.
To see how starting early can add up to a richer retirement, use the MSN Money calculator.