Is it easier to save for retirement if you start earlier in life? Can I make up for what I don't save now by contributing more later on?

In general, the earlier you start saving for retirement, the easier it will be to afford, given the number of financial obligations that tend to be incurred at that later period in your life. A closer look at the interesting aspects of compounding will illustrate how, in the retirement game, the early bird really does get the worm.

Consider two hypothetical twins, Earl and Lance. They are both 25 years old, fresh out of college and ready to start building their retirement nest eggs.

Lance decides that he'd rather enjoy a comfortable lifestyle right away, rather than scrimping and saving like he did in college. Lance reasons that he will be able to save a large chunk of money in his middle-age, because he expects to be earning much more by then. He decides not to contribute to his nest egg for the first 10 years of his career, and then contributes $3,000 per year for the next 20 years of his life.

Earl decides to start saving for his retirement immediately. Earl can only afford to contribute $1,000 to his nest egg each year. Ten years later, when Earl is 35, he decides that he can't afford to fund his nest egg any further.

Let's assume that Earl and Lance both invest their savings into an open-end mutual fund with a 15% annual return.

This table tracks each investor's nest egg at the end of every year until they are 55 years old. Keep in mind that Earl has only saved a total of $10,000. Lance has saved three times as much for twice as long for a total of $60,000.


Earl's $10,000 has turned into a nest egg of more than $340,000, while Lance's $60,000 has grown to just under $314,000. This occurs because Earl is better able to make use of compounding than Lance. Notice that Earl's savings grow to more than $20,000 after 10 years, when Lance begins saving $3,000 per year. This may not seem like a big difference, but unfortunately for Lance it most definitely is. Even though Lance saves three times as much money as Earl and for twice as long, he is still not able to save as much money. In fact, the longer this time line continues, assuming a 15% return each year, the more Lance will fall behind.

Put another way, the dollars that you save in your youth are actually worth much more than the dollars you save near your retirement. The earlier you can contribute savings to your nest egg, the more time they will have to grow. When it comes to paying for a comfortable retirement, therefore, one of the biggest allies you have is time, provided that you start early. If you wait too long, time can become your enemy.

(To learn more, read Retirement Planning Basics, Delay In Saving Raises Payments Later On and Determining Your Post-Work Income.)