On the previous post, we’ve seen the cost of waiting one year when saving for retirement for somebody who’s contributing $300 per month, at 7.5% rate or return with a retirement goal of 30 years.
So the next question is “What would happen if the rate of returns are much higher than the 7.5%?”
How about if we increase the waiting time? How mush is it really costing us if we waited a little longer; say two years or perhaps even five years? Realistically, most of us are procrastinators. A one year wait could easily turn out to be a two year wait in a heartbeat!
Let’s take a look at the various scenarios if you wait 1,2 up to 5 years and with varying rate of returns.
Scenario:
- Annual Salary of $45,000
- Inflation: Not taken into account
- Salary Increase: Not taken into account
- Tax: No tax impact because of tax-deductible retirement plans
- Monthly Contribution: $300 (4% employee plus 4% company match)
- Retirement Goal: Retire after 30 years of working
As the numbers indicated above, if you waited one year before you start saving for retirement, the cost to you is not the $3,600 that you did not contribute for that missing year, but it is actually the amount to which it would have grown to, which is $32,579. So if you waited 5 years the cost to you is $141,055.
What if you are fortunate enough and your investment portfolio returns an average rate of 10% per year, then your cost of waiting dramatically increases to $67,692 if you waited one year and the cost of waiting increases to $280,096 if you waited five years before you start saving for retirement. The cost increases even more if you contribute more than the $300!!
Now you understand why they keep saying Time is money.
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