What Your 20s Are Worth

Constant reminders by parents and grandparents to save for a rainy day and the future are met with skepticism or ignored by those just starting their career. You know the different scenarios: Finally out of college and earning a regular pay check, many will be tempted to make up for lean years and spend everything. For those in their later twenties marriage, kids, and a mortgage can limit the potential to save money.

Have you every wondered how much you could potentially save over 5, 10, or 15 years? Or how much you would need to have even $50,000 of income in retirement? Here are some numbers to consider from my financial planning software:

   Starting age: 25

   Retirement age: 65

   Savings: $5,500 annually

   Rate of Return: 8% annually

   Total at age 65: $1,424,811

          Alternative: Wait 10 years to start saving

   Starting age: 35

   All other numbers stay the same.

   Total at age 65: $623,058

The potential loss is over $800,000 by waiting just 10 years and out of pocket savings of $55,000. This is great example of how compounding interest works for you and the opportunity cost of not saving.

Once you get to retirement, how much should you have saved to earn $50,000 every year in today's dollars? A ball park figure of $850,000 if you continue to earn 4% a year in retirement. Remember, this is in today's dollars and doesn't take into account inflation. 

Now, assume inflation is 3% per year from age 25 until age 65.

   At age 65 $50,000 = $163,000

Withdrawing $163,000 starting at age 65 until age 94, earning 4% a year and inflating the withdraw 3% a year will require you to accumulate approximately $4,000,000 of wealth.

Now you can see the wisdom of your parents and grandparents suggesting you save. Max out your IRA accounts, enroll in your company 401k and at least get the company match. Let your money work for you. Make your 20s even better while building a strong financial foundation.

Locked Up

When deciding whether or not to contribute to a retirement account, some people decide not to because they don't want their money tied up. They know the money can't be withdrawn without paying hefty penalties and taxes and are more comfortable having that cash sitting in their bank account available at any time earning next to nothing in interest.

For those same people, when it comes to spending money on a trip, clothes, home project, or going out to dinner they have no problem locking up their money. When they are 65 and want to retire how are they going to get money from the all the restaurant meals they ate, from all the clothes they bought and all the credit card interest they paid over the last 30 years? When I look in my closet I see clothes and shoes but I also see a bunch of spent dollars, not growing in value and no way to get that money back.

It is important to be good stewards of our money, prioritize how and where it is spent and be prepared for when we don't want or can't work any more.