The cost of waiting

When I first started working I wasn’t immediately eligible to participate in my company’s retirement plan. In fact, I had to wait nearly 18 months before I could participate in the 401(k) program. I had to then another year before the first employer contribution was made. At that time there wasn’t any match in the 401(k) either.

That was a long time ago and plans were run differently. Not long after, the plan was revamped and employees became automatically enrolled within a month of hire which was much better for new employees.

When I told my dad I had to wait nearly 18 months to join the 401(k), he urged me not to wait that long before starting to save for my retirement. He told me to instead open an IRA. He didn’t want a couple of years to slip by when I was young before I started saving. There was this thing he called ‘compounding’. Not fully understanding what he was talking about, I reluctantly listened to his guidance and an opened up an IRA at the tender age of 22 and started putting money into it. I mean… really? I’m 22 and just started my job. What’s this retirement thing you’re trying to get me to think about? Seriously, I need money in my pocket to go out with friends this weekend, not a million years from now! Right?

I have to say – that was some of the best financial advice I ever got. Now, I have a much deeper appreciation for the concept of compounding. I’m still amazed at the value today of that IRA first funded over 30 years ago.

My dad didn’t have any charts or tables to demonstrate the impact of just saving a few years earlier than most folks. But I can create some…

So, what if you’re 22 years old and you think retiring early is something that would be worthwhile pursuing (or maybe you’re well on your way to FIRE but you have kids or nieces and nephews that you can influence)? If you’re thinking you can wait a couple of years before getting started, you might want to rethink that strategy.

Take a look at my example on the left side of the table below. I have someone who, in their early 20’s, decides to take advantage of their workplace retirement account and save $100 a week. Their employer matches their contributions with $25 (a 25% match). The saver also is part of the automatic increase feature of the plan and has the savings amount increased by a modest 5% each year. Using an 8% growth rate, in 25 years the account is worth over $780,000. Not too shabby.

Compare that to the table on the right side. Here, a co-worker, with the same assumptions as before except a decision to wait 5 years before savings that $100 a week and catching the employer’s match. At the end of the 25 years, the ending balance is just over $452,000. Not too bad either, but nearly $328,000 less than the saver who started 5 years earlier.

The display of the graph above demonstrates the earnings growth each year. I’ve highlighted the last three years. You can see that the slope of the green line, showing the growth of earnings for the earlier saver, is much steeper than that of the blue line (the later saver). During this period, the earnings for the earlier saver are 75% greater than for the later saver. If the two savers have the same goal of FIRE after the 25 years, the earlier saver earns $154,314 in the last three years compared to $88,157 for the later saver. That’s a huge difference in the final stages of becoming financially independent.

So you can see, waiting actually has a cost. In order to overcome the delayed savings, you’ll need to put more aside over a shorter period of time to make up for that lost 5 years. You might think that you’ll have more discretionary income in a few years and then be able to save more, but life can get in the way. While you may have all the right intentions to save more, sometimes it just gets really hard to execute.

My advice is to start as soon as you can. I reluctantly listened to my dad’s advice when I was young and am glad I did. Take your first steps as early in your career as you can. Even small amounts can make a big difference. Unfortunately, if you wait, the cost can be significant.

Did you start your journey to FIRE early? What was the influence that got you going at an early age?

Thanks for stopping by.


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