Retirement made easy: How soon should I start saving?

Retirement made easy: How soon should I start saving?

Having enough money to retire on is a worry for many people. In fact for most the issue is so daunting that they prefer to avoid thinking about it at all. They save if their company has an automatic opt-in to a retirement plan and they usually end up investing in whatever fund is the default for that plan.

The first, and most important decision that you can make to affect how comfortably you retire, is the decision to start saving now. I mean this. Whether you are 20 or 40 years old, you should start putting something away. Whether it is online share trading or just a simple index fund is less important than starting as soon as possible. Every month or year that goes past that you are not saving is not just a year of lost saving, but a year of lost earning and opportunity.

Why is it so important to start saving for retirement now?

The British economist and author John Kay in his recent book "The Long And The Short Of It" uses a great example. If you were a squirrel and you were saving nuts for retirement, then each nut that you wanted to have in retirement would have to be saved now. If you earned nuts and planned to work for 30 years and retire for 30 more years (let's be optimistic about how long you'll live), then you would need to save one in every two nuts that you earned. Saving half of what we make now is not a great strategy. You either go hungry now or when you retire.

But the magic of saving is that we aren't saving nuts under a tree. We are investing money in assets that will grow. Every dollar (or pound, or euro) that we save now will hopefully be worth a lot more than a dollar when we retire.

Compound growth is powerful stuff. If you assume that your savings or investments will grow at about 7% a year (which is not too far off their historical rate) then they will double in value before inflation after about 10 years (I'm rounding numbers and fudging the math, but this is close enough - so long as we leave inflation out of the equation).

• The dollar you save now will be $2 in ten years. But then the compounding goes on...
• In 20 years it will be $4.
• In 30 years it will be $8
  
• In 40 years it will be $16
• in 50 years it will be $32
  

Just think. If your parents had put aside some of the thousands they spent on buying you junk over the years when you were a kid into a retirement fund for you, it would be worth a fortune by the time you get to 65.

Most of us, however, aren't lucky enough to had had parents with the money or the foresight to leave us with trust funds. So we have to take care of this ourselves. So that leaves you with a choice. Would you rather put aside $1 now or $8 in 30 years?

It seems a kind of no-brainer that the most important decision you can make towards a comfortable retirement is to start saving now. It is far more important than spending hours trying to choose the best mutual fund or picking stocks. Don't be afraid of taking charge now and getting your retirement finances in order. If you are not saving already, now is the time to start.