The shrinking retirement dollar: why save now?

March 13, 2024

The typical American citizen lives a relatively predictable life cycle. At the age of 4 or 5, we enter the education system. After achieving whatever level of education we desire, we exit that system and become wage earners. We earn that wage for a few decades, then if we are lucky, we retire for a couple of decades before we pass away.

From an earnings standpoint, we typically earn the least amount of money when we are young. As we grow in experience, education, and performance, our earnings go up. As our earnings go up, so does our ability to save money for retirement.

There’s one very large issue with that script. It’s critical that we save for retirement early on when we are earning the least. Compound interest is your best friend. If you save money that can remain invested for decades, compound interest can increase that balance by orders of magnitude.

As we get older, that retirement date gets closer. The amount of time our money can remain invested for that purpose decreases. The same dollar saved at age 50 has much less impact on retirement as it did if we saved it at age 30.

Let’s use the rule of 72 as an example. If your money earned 7.2% interest, its value doubles approximately every ten years. If we saved that dollar at age 30 and it grows at 7.2% interest, then at age 60, it’s worth $8. If we saved it at age 50, it’s worth $2 at age 60.

So if we were to earn 7.2% on our money, a dollar saved at age 30 is four times more impactful to our retirement than the same amount saved at age 50.

It’s hard to save when we are young. Retirement is a long way off. It’s hard to see something so far away as a priority. Force yourself to make it a priority. It needs to be second on your list right behind your grocery bill. Eat, save, then build the rest of your life. Make it non-negotiable. It’s hard to save, but it’s even harder to save your way out of a hole if you started too late.

The rule of 72 is a mathematical concept and does not guarantee investment results nor functions as a predictor of how an investment will perform. It is an approximation of the impact of a targeted rate of return. Investments are subject to fluctuating returns and there is no assurance that any investment will double in value.