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Thayer Partners Blog

4 Benefits of Planning for Retirement Early

[fa icon="calendar"] Aug 19, 2016 9:00:00 AM / by Chris Wilmerding

Chris Wilmerding

4_Benefits_of_Planning_for_Retirement_Early.jpg“You can never start too early” seems to be conventional wisdom when people talk about planning for retirement. In a lot of ways, it’s true; the earlier you start planning your retirement, the easier retirement will be when you actually get there. If you need more convincing, look no further than these 4 benefits.

4. Waste Not, Want Not

As Americans, we can often become obsessed with having the latest gadget or keeping up with the Joneses. But these kinds of discretionary expenses can distract you from long-term goals like planning for your retirement. The sooner you start planning for retirement, the sooner you can put that plan into action. And the earlier you start saving, the less money you’re likely to waste on frivolous purchases. There’s an added bonus here: you’re less likely to feel pressured to keep up appearances or to buy things just for the sake of having them.

3. Maximize the Benefit of Retirement Savings Plans

Plenty of employers offer a 401K or similar retirement savings plan, but many people don’t take full advantage of these plans until their 40s or 50s when retirement is no longer far in the distance. There are a few compelling reasons—regardless of how far you are from retirement--to start early and take advantage of an employer-sponsored plan. The first is that you’ll have a longer time to contribute, which simply means you’ll put more money into your account. The second reason is that many employers have a contribution match program. The same logic applies here: the longer you contribute, the longer your employer contributes as well. Since 401Ks are investments, a longer timeline helps your account grow even more.

Perhaps an even better reason to contribute to a 401K plan is the tax incentives; your contributions come from pretax dollars, which means that your contribution “costs” you less in the long run since you are growing pre-tax money. Pre-tax money grows to become a larger nest egg than after-tax money.

2. More Time, More Money

One of the most important things to remember about any kind of investment is that they need time to grow. The markets can be bumpy, experiencing wild swings in short spans of time, so if you pick the wrong time to invest, you could see your retirement funds dwindling—at least for a short while. However, over the long haul, the markets tend toward growth (if they don’t grow over 20 o4 30 years, we probably have bigger problems). The longer your timeline for investment, the more successfully you’ll be able to ride out investment ups and downs and grow your retirement account value.

Another critical factor when considering your timeline is compound interest or, its first cousin, compound growth. With most investments, as your account grows, your earnings and appreciation are reinvested. The reinvested amount then grows as well, causing a compounding effect. For example, if you loaned $10,000 for 10 years at 10% interest and did not re-invest the interest collected, your account balance would be $20,000, assuming your loan principal was repaid. If you invested $10,000 for 10 years at a 10% growth rate (with all earnings reinvested), your account balance would be $25,937, which is $5,937 or about 25% higher than in the non-compounding scenario. And over more time, like 30 years, the benefits of compound growth are even more surprising. Again, using $10,000 as a starting point and investing it over 30 years at a 10% compound growth rate, the ending value is an incredible $174,494! A 30-year loan at 10% where interest is not reinvested has a balance after three decades of only $40,000. Compound growth earned you $134,494 more. So, given enough time, compounding can have a huge effect on your account balance.

1. Reach Retirement Sooner

The sooner you start planning for retirement, the sooner you’ll get there. It might seem like a bit of an obvious statement, but it’s the truth. If you start planning for your retirement at age 50 instead of age 60, or age 30 instead of age 40, you’re giving yourself a longer lead time to build your account. But you can also shorten your timeline when you start earlier, in effect reaching your financial independence sooner. The longer you wait to start, the longer it will take to reach a point where you feel you comfortable enough to retire.

“If You Don't Know Where You Are Going, You'll End up Someplace Else.”—Yogi Berra

It’s never a bad idea to plan for retirement, no matter what your age. Book a meeting with your financial advisor to talk about how you can get started sooner rather than later, and to discuss what strategies will help you reach your retirement goals. After all, getting from Point A to Point B is easier when you have a map with good directions.

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Topics: Planning for Retirement

Chris Wilmerding

Written by Chris Wilmerding

Chris Wilmerding is Principal of Thayer Partners, an independent investment management firm located in Westwood, MA providing financial planning and wealth management counsel to individuals and their families.

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