Personal finance expert and podcast host Suze Orman says many people in their 20s are missing out on hundreds of thousands of dollars in retirement savings because they don’t “get it” the power of compound interest. says.Women and money (and everyone smart enough to listen). ”
“They don’t understand the value of compound interest, and they don’t understand that age is the key to financial independence,” Orman said in the paper. Recent interview with the Wall Street Journal. Part of the problem, he says, is that young people think they can recoup their retirement savings when they get older and earn more.
It is important to build up savings for retirement. If you underestimate the amount you need to invest to get it back later, or the total amount you need to reach retirement, you may have to continue working until a later age than you would like. In some cases, you may not be able to retire at all.
To illustrate the power of compound interest, Orman gave the example of a 25-year-old who invests $100 a month in an S&P 500 index fund through a Roth IRA until age 65, assuming an annual interest rate of 12%. That person will retire with about $1.2 million in retirement savings, according to CNBC’s calculations.
However, if you start saving at age 35, your total will be just over $350,000. That’s the difference of about $850,000 you would lose if you started investing just 10 years later.
This is due to the power of compounding, a process where interest is earned continuously on both the principal and the accumulated interest, leading to exponential growth over time. Thanks to compound interest, the sooner you start contributing, the longer it will take for your money to grow.
”[Many young people] I don’t understand that,” Orman said. “They would rather wear cool clothes and go on TikTok.”
All investments involve the risk of losing money. Also, a 12% annual return is not often considered realistic. Historically, the S&P 500’s average annual return has been about 10%.
But even with a 6% annual return, a 25-year-old who contributes $100 a month will have just over $200,000 by age 65, which is more than he would have if he had started contributing at age 35. It will be doubled.
Young people tend to earn less than later in life, but Orman says that’s no excuse for delaying monthly retirement payments. Instead, young people should focus on living below their means but within the necessary range so that they can afford to make monthly retirement payments.
Orman recommends prioritizing these contributions and reducing additional contributions to help fund your retirement. For example, “I refuse to eat out,” she said. “I think eating out at any level is one of the biggest wastes of money.”
Avoiding lifestyle disturbances can also be helpful. When Orman started making money with her books, she decided she could afford a “$1 million or $2 million penthouse,” she told the Journal. Instead, she chose to live below her means and bought a $250,000 apartment.
In other words, just because you can afford something doesn’t mean it’s a smart purchase.
“The truth is, if you can, you should invest more in your 20s than in your 30s,” Orman said in a 2018 CNBC Make It interview. Doing so will reduce the burden on younger earners to claw back their retirement savings later on.
“I’d rather have them invest a certain amount, a smaller amount, while they’re younger, rather than waiting and having to invest five or six times.” [as much] “When I’m older,” she said.
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