You’re Not Too Young to Start Saving for Retirement

HAVE YOU EVER HEARD the story of the king, the chessboard, and the grains of wheat? The story goes that when the creator of the game of chess showed his invention to the king, the king was so pleased that he told the inventor to “name his price”. Rather than being paid in gold for his invention, the wily inventor asked his king for one grain of wheat for the first square in the chessboard, two grains for the second, four grains for the third, doubling the amount each time. The king was thrilled, thinking that he was getting a great deal. The king soon learned his mistake. Although the amount of grain was trivial for the first few squares, by the 64th square, the amount of grain accumulated filled a building 25 miles long, 25 miles wide, and 1000 feet tall!

The principle behind COMPOUNDED EARNINGS is similar to the accumulation of the grains of wheat in this story. Earnings compound when you earn returns on your original investment as well as on any previous returns that remain invested. Each year your earnings compound, there is more money available to work for you! The more time you have, the more opportunities you have to compound your earnings.

What does this mean for you? The EARLIER YOU START, the easier it is to accumulate enough money to meet your retirement income needs. By starting early, you are giving yourself more “squares on the chessboard” or opportunities for your earnings to compound. Just like the king, you will be amazed at what a difference it can make. So it’s never too early. Whether you are 20 or 50, the sooner you start, the easier it will be. What’s more, because your investment is not taxed until withdrawal, your original investment, along with all its accumulated earnings, works for you tax-free throughout your pre-retirement years.

Consider a hypothetical example. If you earn an 8% annual return on your investments and reinvest all of your earnings, then every 10 years your account balance will double. In the first 10 years, your original investment of $10,000 will double to more than $21,500. In the second 10 years, your new balance of $21,500 doubles again to over $46,000. Each decade your original investment PLUS your earnings double again. Because you earn returns on your original investment and all earnings accumulated to date, compounded earnings can have a dramatic effect on your savings. The earlier you start, the more your money can work for you.