When it comes to retirement planning, it’s never too early to start saving.
The more you invest and the earlier you start means your retirement savings will have that much more time and potential to grow.
By investing early and staying invested, you may be able to take advantage of compound earnings.
“Make money on your money” is the concept behind compounding. Compounding is when the money you earn from your investments is reinvested for the opportunity to earn even more.
By investing in a retirement plan, you can get even more benefit from the power of compounding with tax-deferral. Your retirement account has the potential to grow faster because the money you would have paid in taxes on earnings each year remains in the account and can earn additional money.
Keep in mind, though, that while compounding can make an impact over many years, there may be periods where your money won’t grow.
The earlier you start, the longer your money has the chance to compound. Use our investment calculator to find out how much your retirement dollars could grow, given the benefit of time.
Waiting to start saving can have a major impact on your retirement.
For example, suppose you have a current salary of $30,000, receive 4% annual raises and plan to retire in 30 years. You put 4% of your salary into a retirement plan each year and earn an 8% annual return.
This hypothetical illustration does not represent the results of any specific investment. Your investment experience will differ.
Putting aside a portion of your salary can be a challenge. Many people want to contribute the maximum permitted by their plans but find it takes too big of a bite out of their paychecks.
Here are two strategies that may help:
Increase your contribution over time.
Try increasing your payroll deduction by 1% every quarter until you reach the maximum contribution amount.By increasing your contributions gradually, you may notice a slight difference in your paycheck. But with compounding, each additional 1% could be worth far more in the long run. Try our payroll deduction analyzer to see the impact of your pretax deductions on your take-home pay.
Invest a portion of each raise.
Each time you get a raise, give your retirement plan a raise as well. Take a percentage of your salary increase and add it to your payroll deduction program.
You’ll still take home a higher salary while your retirement nest egg benefits from increased contributions.
A regular investing program does not ensure a gain or protect against loss. Its success depends largely on the investor’s willingness to continue buying shares. You should always consult a financial professional when making long-term investment plans.
Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.
Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing.
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American Funds Distributors, Inc., member FINRA.
This content, developed by Capital Group, home of American Funds, should not be used as a primary basis for investment decisions and is not intended to serve as impartial investment or fiduciary advice.