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Planning Strategies

Retirement: Planning Strategies: Saving For Retirement

What difference does it make if you save for retirement now or wait until later? The short answer can be: A lot.

You have probably heard that time can be on your side when you begin saving for retirement sooner rather than later. Consider this example: Jill and Tony are each age 22 when they begin working for ABC Corporation. Right away, Jill decides to save $2,000 each year for retirement. Tony, on the other hand, decides to wait until later.

Jill opens a traditional IRA with The Principal®, saving $2,000 each year for 10 years and then stops contributing to the plan. For the sake of this example, let's say the IRA grows at a hypothetical rate of return of 8% each year.

Tony waits until he is 30 to open a traditional IRA with The Principal, saving $2,000 each year for 35 years. Again, let's say the IRA grows at a hypothetical rate of return of 8% a year.

Jill saved for 10 years. Tony saved for 35 years. Whose IRA was worth more upon reaching age 65?

Hypothetical Value of Traditional IRAs: Jill and Tony

AgeJillTony
22$2,000$0
234,1600
246,4930
259,0120
2611,7330
2714,6720
2817,8460
2921,2732,000
3024,9754,160
3539,41817,846
4057,91737,954
4585,10067,500
50125,039110,914
55183,724174,702
60269,951268,427
65394,646404,141

Not designed to project or reflect past performance of any specific investment option. The rate of return in this hypothetical is constant over time when actual account values may be subject to market risks that cannot be predicted. This example does not reflect any of the fees associated with investing.

You may be surprised to learn that the IRA account values would be about the same. Starting to contribute late is better than not starting at all, but take note of the difference starting early can make.

Looking at the chart, you'll see how compounding may impact the values of each account. Because Jill started saving earlier, the money in her traditional IRA had more time to grow tax deferred. Tony's contributions had less time to grow tax-deferred, so he had to put away more of his own money over a longer period of time to reach a similar level of retirement savings.

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