You may be thinking that you’ll save for retirement later. Right now, there are bills to pay and things you want to do with your money, so retirement isn’t on your radar. You may also be thinking, “How impactful could just a small amount of money saved really be for me—will it make a difference?” A lot of people have this mindset, so what are the potential problems with thinking this way?

The biggest one is missing out on compounding returns. Here’s how compounding returns work: Let’s say you have $10,000 in an account that yields 4% in interest every year. At the end of your first year, that account will be worth $10,400. Having an extra $400 is nice and all, but the real power of that $400 is that it will start to earn interest now too! That is what we mean when we say compounding returns: the money you make from your accounts has the opportunity to start earning money, too.^[1] Over time, this may have a positive snowball effect on your savings.^[1] In our example, let’s say you left money in your account for 10 years. By the end of 10 years, you would have about $14,800 in your account. You’ve actually made more than just $400 a year with the power of compounding returns!

So, if you aren’t contributing to your retirement accounts, you may miss out on the benefit of long-term compounding returns. As the saying goes, the best time to start saving is yesterday, and the next best time is now.

The other issue that may come from waiting too long to contribute to your retirement accounts is taxes. Contributions to most retirement accounts are tax-advantaged in some way. For accounts like traditional 401(k)s, you can reduce your yearly income by your contributions to your 401(k), and this can sometimes mean reducing your tax bracket and keeping more of your money in your pocket, especially if you have immediate costs to cover.^[2]

Contributing to retirement accounts isn’t the only strategy to consider when planning for retirement. Retirement planning requires a complete understanding of your individual financial picture, and you may need multiple strategies or adaptive strategies based on your specific circumstances. Our professionals can help you build and execute strategies selected purposely for you. Consider reaching out to our professionals today for a complimentary review of your finances.