By Philip Bachman
Most of us know the common knowledge that the sooner we start saving for retirement, the better off we will be. This wisdom is as old as the ages. But maybe some folks need a sign, literally, to put weight behind the idea that there is a cost to delaying saving for retirement.
My wife and I were recently strolling through historic downtown Abingdon, VA, browsing the local shops’ windows. One storefront belonged to an investment company. Displayed in the window was a sign showing the hypothetical cost of waiting one year or five years to save for retirement. The sign gave an example similar to the one below, and it had charts to graphically depict it.
It was not new information, per se, but I liked the sign because it gave passers-by a “black-and-white” reason to consider saving for their future selves sooner rather than later. Although we are discussing retirement in this article, the same principal holds true for reaching non-retirement financial goals. It also holds true as a motivation to increase our savings whenever possible, whether we are young, mid-career, or already in retirement.
A study by Prudential is relevant to this subject. The study found that 56% of adults have difficulty imagining their future selves. Also, behavioral science researchers found that people have difficulty identifying with their future selves even when shown computer-altered images of themselves as aged (“How our brains may be hard-wired against saving”, USA Today, 10/27/2016).
Whether it is easy for us to perceive ourselves in the future or not, there is an opportunity cost to delaying saving and investing. That cost increases as the years pass because of compound interest. Consider the following example:
(Source link here. The above figures assume a starting balance of $0, ongoing $400 monthly contributions, an annual interest rate of 5%, and interest compounded annually. The above figures are for illustration purposes only. Investing involves risk, including the possible loss of principal.)
In our example above, the opportunity cost of delaying funding a retirement plan by just one year is $19,757! Note that is far more than the one year’s worth of forgone $400 monthly contributions, $4,800, because of the compounded growth over time. Waiting five years has an opportunity cost of $89,816, which is much more than the $24,000 that would have been the sum of the five years’ worth of $400 monthly contributions.
The calculations could look different based on someone’s individual circumstances, but the message is clear. It pays to save and invest now. Who knew that a sign encouraging us to contemplate our future selves would be found in a historic downtown window between crafting stores and antique shops?