By Derrick Longo, Wealth Advisor
At some point, working may no longer be possible or desirable. When that happens, the money you’ve saved will need to cover your expenses. Social Security may help, but it likely won’t be enough. Without pensions or other guaranteed income sources, more responsibility is falling on the individual. Starting earlier gives you more time to build what you’ll eventually need.
Compounding interest plays a major role in making that possible. It allows the money you invest to grow on its own, and then for those returns to keep growing.1 For example, investing $5,000 at age 25 with a 7% annual return could turn into nearly $75,000 by age 65. Waiting until age 35 might cut that in half. Time makes a big difference, and the more of it you give your money, the better your position can be.
There’s also the issue of missed employer contributions.2 If your company offers a match and you’re not contributing enough to receive it, that’s money you’re giving up. Over time, that match, along with the returns it could have earned, adds up. It’s not just about your own savings; it’s about taking full advantage of what’s already being offered to you.
Many people delay saving not because they lack the funds, but because they’re unsure of what to do. There’s often a belief that it will be easier to start later, once income grows. But expenses tend to grow with income, and over time, it can become harder to carve out room to save. Early in your career, before other financial commitments take hold, you may have more flexibility than you think.
One of the most helpful steps is understanding what your plan offers. Know the match policy and review the investment options. If there’s an advisor assigned to the plan, schedule a time to talk. That kind of support is usually available at no extra cost and can save you from making decisions in the dark. Too often, people default into conservative investments that don’t reflect their timeline. If you’re not planning to use the money for decades, you may be able to take more growth exposure than you realize.
Lately, with markets being volatile and headlines focused on inflation,3 more investors are second-guessing their allocation. This shows up most often in individual accounts, where there hasn’t been a clear plan in place. When someone hasn’t set aside enough in conservative assets and the market drops, the temptation to sell is strong. But when the portfolio is built with the right balance, people tend to feel more confident staying invested. Planning ahead matters more in those moments than anything else.
If your allocation doesn’t feel right, don’t wait for things to turn before acting. That sense of discomfort is usually a sign it’s time to revisit your risk tolerance. Talk with someone and make a plan to adjust when the market is in a better place. The recovery window is often when the best changes can be made, but people tend to miss it.
Getting started late is not ideal, but it’s also not the end of the road. There is always a place to start, and the key is not to get discouraged. Take the next step, even if it’s small. Use the tools your employer provides, ask questions, and get clarity.
The sooner your money is working, the more options you’ll have down the line. Compounding takes time, but it also needs action. Even small steps today can set you up for more freedom later. If you're unsure how to start retirement planning, your Exencial advisor is here to help.
Sources
- Investopedia (8/1/24) - Compounding Interest: Formulas and Examples
- Plansponsor (12/2/24) - The Mechanics of Matching
- MarketWatch (5/6/25) - Current market volatility is above the historical average. That may continue throughout 2025
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