Why is saving important? Because it adds up.

I’m currently 27. I made my ROTH IRA contribution for 2009. While the contribution limit for 2009 was $5,000, compound it at 10% over the next 37 years (when I’m 65) and it will have reached $170,016.74. Of course, that is presuming that the entire amount was withdrawn at 65.

The twist comes when you take into account the fact that I’ve also made ROTH contributions in previous years so while the 2009 contribution could reasonably grow to 170K by 65, I won’t be withdrawing 2009’s contribution when I’m 65, I’ll be withdrawing the contributions that I made in 2004 when I was 22.

Age 22 - 2004 - Withdraw contributions made at 65
Age 23 - 2005 -Withdraw contributions made at 66
Age 24 -2006 -Withdraw contributions made at 67
Age 25 - 2007 - Withdraw contributions made at 68
Age 26 - 2008 - Withdraw contributions made at 69
Age 27 - 2009 - Withdraw contributions made at 70

So, instead of withdrawing 2009’s contribution in 37 years at 65, I can plan on withdrawing it in 42 years at age 70. Instead of a planned $170,000, the additional five years allows that amount to become $273,818.50. (Growth of 61%)

Don’t forget inflation. If we assume a rate of 4% annual inflation, what can be purchased with $50,000 today will require $259,639 dollars in 2052. (42 years from now) After accounting for inflation, a $5,000 contribution today will have a relative value of ~$50,000 after 42 years. In other words, it will increase in value by a factor of ten.

This is why it is important to save early. Whether or not one continues to save after those first ten years or so buckling down becomes increasingly irrelevant, the war is already won while others haven’t even figured out that they’re mid-battle.

Another thing to remember : taxes do not apply to a ROTH. So if that 270K was in an IRA or other account where taxes are required. Withdraw that 270K and pay the current 33% tax and you’re down to $180K before you start.

That assumes that taxes won’t go up in the future…which I believe they will. There is but one path that our continued deficit growth and sense of entitlement will lead; throw in an increasingly aging population with the promises of social security and you’re talking about brewing one heck of a storm for those who aren’t hunkered down in tax advantaged accounts.

All this talk of waiting 37 years…42 years…or whichever can be a little bit intimidating, especially if you’re pushing 35, 45, or even 55 and want to believe that you’ll still have the big bucks come 65. If you invest the $5,000 and earn 10% for 30 years, you’re receiving $87,000. Invest for even 20 and you’re at $33,000. So even when you start punching in lower numbers, the incentive to save is still there.

I might not want to wait until 65 to retire and if I’ve saved early, that is a certain possibility, I could take out contributions made at 23 at age 43 in 2024 and spend my $33K/year for the next 20 years (assumes continued contributions from 23-42)…just in time to start collecting the social security checks for which I really shouldn’t expect to provide much.

$33K is hardly enough to provide for the standard of living many of us have come to expect, but shouldn’t that fact alone make the case for early savings? This is the reality for someone that starts saving at 45 with the expectation of retirement at 65.

Solution? Save early…because punching larger numbers into the compounding interest calculator leads the result to make you feel warm and fuzzy!

Happy weekend!