For every person who receives a windfall late in life to create an instant retirement fund, there are probably thousands who do not. Wishing rarely funds a hefty retirement account. Starting early and steadily investing is the surest route to financially secure retirement years. Reasons to start your retirement plan early are easy to find.
It gives you time to recover from mistakes.
Everyone makes investment mistakes. Even professional market watchers do not get it right every time. Novice investors will have a number of misses before they learn to invest properly for maximum success. Young investors have a tendency to be drawn to high risk investments that seem to offer a quick route to wealth. These mistakes are okay if you start young. You have time to rebuild your portfolio in a better direction and still end up where you need to be at the end of the journey.
The stock market does not pay interest.
If you could put money into a savings account that would return you 10% or 12% interest, you would have little incentive to invest in stocks. Unfortunately except for a few short years three or four decades ago, no one pays that much in interest.
This means that you have to invest and not save.
Mutual funds and their cousins offer relative safety in the stock market. They do not pay interest but offer the opportunity for growth. Stock price increases, stock splits, and dividends offer ways to increase your wealth in the stock market. Your wealth increases as the stock you own gains value.
Financial gains need time to multiply.
Just as interest compounds, stock growth can also compound. In a good mutual fund, continually buying low and selling high nets asset growth that looks a lot like interest. As this cycle is repeated, money can grow exponentially. For modest amounts to become large requires years to pass just as money in a savings account needs time. At 10% growth, your money should double every 7 to 10 years.
Your investments can grow with your income.
By starting early, it gives you time to increase the amount that you invest each year. Eventually, your deposits will become sizeable compared to the beginning amounts. Without those small steady deposits already in place, you would have to double or triple the amount that you are investing in later years to even get close to same final amount.
You have a better opportunity to recover from poor economic performance.
Every few years, national economies experience a downturn. This can last from a few months to a few years. Investment growth can slow to a snail’s pace or even reverse for a short time. If you have time to wait, you will not find these swings to be too unsettling because they always come back up. Usually one to three years after a major low, the stock market will be setting new record highs. If your time horizon is too short, you may find yourself unable to have your wealth built before retirement time arrives.
Starting early can lead to early retirement.
It is impossible to predict precisely where you will be financially 20 or 30 years from now. If you start building investments early, you strongly enhance the odds that you will get to your financial destination early. The opposite is also true. If you start late, you will arrive late.
Other investments besides retirement can be brought online.
Retirement is not the only investment need for most families. You may have to help fund higher education for yourself, your spouse, or your children. Successful investors also try to have some funds set aside for replacing major items like cars. Having investments set up to fund your new cars is a much better idea than having car loans and leases. You may choose to invest in real estate. Even having the finances to start a new business is possible once you have secured your retirement nest egg.