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How
much should you be saving for your retirement …
There is no one-size-fits-all answer to this question. However
as a rule of thumb, the sooner you start saving, the better off
you will be in the long run.
The illustration below shows two
sisters saving for retirement. Cathy began saving at age 30 and
saved $2,000 each year for 10 years. After that, she decided to
stop saving completely.
Vicky waited until she turned 40 to start
saving for retirement. She saved $2,000 each year until she turned
65-that's 25 years. So, Vicky saved for 15 more years than her
sister, Cathy. Assuming they both earned an 8% annual rate of
return, who do you think ended up with more money at age 65?
Who will have more money at age 65?
Cathy started saving for retirement at age 30. She saved $2,000
a year for only 10 years. How much will she have at age 65?
Vicky waited until she was 40 to start saving for retirement.
She saved $2,000 for 25 years. How large is her nest egg at retirement?
Cathy, the early saver
If you answered Cathy, our early saver, you're right! She only
put in $20,000, but her account grew to over $200,000 by retirement.
Her sister, Vicky, who invested a total of $50,000, ended up with
just over $150,000. The difference? Time and compounding investment
growth. 
When your money earns interest or dividends, which automatically
get reinvested, your account increases in value allowing you to
earn interest on the increased value of the account. Growth on
growth … when this happens, this is called compounding.
So do not ignore the impact of compounding and time as when these
two factors work together to your benefit … your nest egg can
grow much quicker. But remember … it's never too late to start
saving, waiting can be expensive. So use what time you have to
your advantage.
Copyright 1996 - 2005
Australian Financial Services Directory
ACN 073 099 966
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