When I was in my late teens, my father shared with me some retirement savings advice that was so compelling that I said, * “I need to start investing today!”* and I while I didn’t really know how to start investing, I did some basic research with “Value Line”, sought out an actual broker (this was before you could invest online) and bought my first stock (Philip Morris if you can believe it). What he said sounded too good to be true, and counter intuitive, for a highschooler who had been well-versed in math and calculus, but completely naive to real world investing and financial modeling. He said,

“If you started investing at age 25 and put the same amount of money into stocks until age 35,

than if you started saving at 35 and invested the same amount of money in stocksyou’d have more money at retirementEVERY YEARuntil retirement”

So, putting $5000 a year away from 25 to 35 yields more than putting $5000 a year away from 35 to 60?

Yes, here’s the data. It’s just as compelling when running out to 65, but most people like to at least plan for a retirement earlier than 65 these days, I used 60 for my retirement investing model. And it works with any annual amount. The trick is the annual return of course. If you cherry-picked a horrendous investing period by starting 10 years ago, you didn’t earn the long-run 8-10% return that the stock market returns when accounting for dividend reinvestment. However, after the recent precipitous decline in equities, it’s probably not unreasonable to assume that you could earn 8% per year from here over a 20-30 year period given the other hundred + years of data supporting this trend. I utilized 8% which is at the low end of the oft-quoted 8-10% estimates in the literature.

Here’s a graphical representation fo the difference between starting to invest at 25 years old vs. starting to invest at 35 years old.

**Outcome of starting to invest early:**

The 25 year old starter invests $55,000 and ends up with $615,580 at retirement.

The 35 year old starter invests $130,000 and still has less at retirement: $431,754.

So, if you’re a young saver questioning the value of starting this early (hopefully upon reading this, if you’re not already doing so, you’ll start investing today!), if you’re the proud parent of a young adult just entering the workforce, or if you’re trying to teach your college kid some college financial tips, please share this article or follow my future articles in RSS (what is RSS?).

Some other related articles you may find interesting:

Is Now the Right Time to Start Investing?

10 Tips for College Freshmen: Financial Advice to Live By

Top 10 Places to Work for New Grads in 2008

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I love these graphs and charts. This is the easiest way to drive home the point of saving early.

thomas’s last blog post..Swine Flu and Financial SecurityUmpa Reply:

October 29th, 2011 at 1:20 am

@thomas,

Actually, I think if you start investing in stocks now, you will actually have less than the principal amount as your net worth will nosedive and evaporate.

Hi Darwin,

Love your site, lots of interesting articles and posts. Just a note on this post however… your calculations for the 25 yo starter investment period is incorrect for the last two cell values of your spreadsheet screenshot… assuming that we continue your calculation at 8% flat interest compounded annually, the ‘Final Retirement Value’ should be $332,578.32 which unfortnately means that you’ll need to continue with your $5000 annual contribution for a few more year (even if you started at 25yo) to exceed the value of the 35yo starter.

Thanks for your comment.

Out of lack of technical sophistication, laziness or whatever I should call myself, I couldn’t fit the entire spreadsheet into one screenshot. So, what I did was – I cut out years 51-58 and had that little admin note to demonstrate (note how the $ values jump up as well); the cells were hidden. In the source spreadsheet, it’s a continuous calculation, but I omitted those years so you could see the final output at age 60. The reason left column has this probably is because the 25 yo investor has 10 extra years (cells) to fit into the picture.

Hope that helps!

Hi Darwin,

Yes it does help! Sorry, I’m a blind as a bat! Usually when I’ve seen diagrams with skipped/hidden cells there’s usually a gap or some dots to denote time passing. Your dad gave you great advice. The power of compounding returns is really amazing. If you started saving $5000 pa from 25, there aren’t that many reasons to stop saving that $5000 from 25 -60 🙂 …especially once the habit of saving has been ingrained 🙂

Hi Darwin,

Yes it does help! Sorry, I’m blind as a bat sometimes! Usually when I’ve seen diagrams with skipped/hidden cells there’s usually a gap or some dots to denote time passing. Your dad gave you great advice. The power of compounding returns is really amazing. If you started saving $5000 pa from 25, there aren’t that many reasons to stop saving that $5000 from 25 -60 🙂 …especially once the habit of saving has been ingrained 🙂

Cool graphics. I had a similar “Eureka!” moment – after reading a Motley Fool book if I remember correctly.

I’d already started saving in my early 20s, and starting investing around 30. Fortunately that was after the dotcom crash, but then of course we saw another crash soon afterwards.

I’ve kept ploughing money in throughout, and I expect it all to compound nicely over time – war and eco-disaster notwithstanding!

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