When Should I Start Saving for Retirement?

By Amit Rupani

When you are young, you are in one of the best positions you will ever be in to start planning for retirement. It might seem strange to start planning for retirement from a career that you may have just started. That's because time is your best ally when it comes to investing for retirement.

Let's look at a hypothetical example. Ms. A and Ms. B, both 21 years old, bright and intelligent, started working in their first job after graduating from college. Both started with same after-tax annual salary of $60,000 which will remain constant. Ms. B is very serious about her retirement planning and starts to save 15 percent from her paycheck towards retirement account. She manages to contribute $9,000 annually to her retirement account. Whereas, Ms. A believes it's too early for retirement planning and would like to enjoy her young days. She decides to save 15 percent of her salary, i.e. $9,000, every year for retirement when she turns 30. Both of them would retire at 65. Let's assume that their investments grow at about 10 percent every year.

Ms. B saved $9,000 every year until she was 30. She contributed total $90,000 in 10 years. Then for some reason she wasn't able to save for retirement and stopped her contributions but let her retirement account investments continue to grow. Right at the same time, Ms. A, realized it was about time for her to start retirement planning. She started contributing $9,000 every year and did that until she was 64. Her total contribution towards her retirement account happened to be $315,000 in 35 years. Below is the table summarizing their contributions and growth in the value of their retirement account.

Look at the mindboggling difference in ending retirement account value. Ms. B's account is at $4.46 million versus Ms. A's account at $2.95 million. Ms. B's account is higher by ~51 percent even after not contributing a single dollar after she turned 30. Her total contribution is paltry $90,000 compared to $315,000 of Ms. A, and Ms. B ended up with significantly higher ending value because of 10 years of extra runway of investment and self-control to delay gratification compared to Ms. A.

Returns from the stock market are never going to be in straight-line as it looks in the table. Some year stock market will give 20 percent positive return and some year it will give negative 30 percent return. Annualized S&P500 returns with dividends reinvested have been about 10 percent for any 30-35 years of investment horizon in last 90 years. The key in stock market is not what or when you buy and sell. It's how you behave when the market is swinging from greed to fear and vice-versa. Get a professional financial advisor's help if you feel uneasy when markets suddenly drop 20 percent and you feel unsure about your equities' allocation.

I don't see a reason why someone would not have a successful retirement if following important steps are implemented:

• Start early to save regularly for retirement
• Have a diversified portfolio with optimal allocation to different asset classes (buy right)
• Stay the course until you reach the finish line (sit tight)

Happy investing!


Amit Rupani, CFA is an Independent Investor, practices Value Investing principles, manages money for long-term wealth creation through Equities asset class. Email: rupaniamit@yahoo.com