Younger Workers

January 12, 2016

If you’re a millennial, you’ve probably amassed some student loan debt. Although you’re working, saving strikes you as an often impossibly difficult task. You’re not alone. The savings rate for workers under 35 according to Moody’s Analytics was a negative 1.4% in 2014.

That lack of savings sets a pattern that has long range implications for millennial workers. If you don’t start savings habits early, you’re financially less likely to be secure in the future…often regardless of your earning potential. Much of the reason is simply the math behind the power of compound interest. The earlier you begin saving, the more powerful compounding becomes. To paraphrase an old Rolling Stones classic, “time is on your side”, but only if you start early enough in your career to let the dollars grow. If you start late, you never catch up.

One often used example of the how compounding works to your advantage involves two twin brothers. Let’s call them Jackson and Scott. Both went to work for the very same company at 25 years of age and worked until they were 55. At 55, they both opted to retire early. The brothers, however, has very different savings habits.
Jackson began funding his 401k immediately from his date of hire. Each year, he contributed $5,000. Over his working life he averaged a fairly modest 7% return. When he took early retirement he had amassed $467,304.

Scott was a bit different. At 25, he couldn’t think much about saving for the future, let alone retirement. It seemed too far off and there were more important needs like a “nice ride” and weekends. Scott didn’t do anything for 10 years. At 35, he came to the realization that he’d better begin saving. To catch up with his brother Jackson, he decided to double his contribution to $10,000 instead of the $5,000 Jackson continued to contribute. Scott did this for the next 20 years.

Like his brother, he also earned an average of 7% each year on the contribution. Each brother earns the same 7% return, but the totals are not the same at the end of their 30 year career.

Jackson had $467,304. Scott ended up with $399,955. Starting the savings habit earlier gave Jackson a 17% advantage.