The most common and expensive mistake I've seen early career employees make

Disclaimer: #

The content of these articles is intended to provide general personal finance knowledge and does not constitute professional investment advice. It’s essential to seek guidance from a licensed financial advisor for decisions tailored to your specific circumstances #

For most early career employees retirement is far away, they have more immediate pressing financial concerns with student loans, rent, etc. So IRAs, 401k accounts, Roth v/s non Roth seems like too much to think about and they just put it on the back burner to come back to at some point in the future.

This might seem pretty insignificant when you are just starting out your career but ignoring this will likely cost you tens of thousands of dollars in the short term and hundreds of thousands in the long term. This difference in your eventual retirement account balance is going to come primarily from two main sources

1. Employer Matching #

    A lot of employers will match 50-100% of your retirement contributions up to a maximum of 5-7% of your base salary. Put simply, if you make 50k and your company does a 100% match up to 5% of your salary, then for every 1$ you put in to your retirement account your employer will also put 1$ there for you. At 5% of your salary match, your employer will put up to 2500$ in your retirement account. The higher your salary the higher the match you can get. As you progress in your career this will start becoming more significant each year.

This is basically free money, its like making a guaranteed 50-100% return on your investment immediately with no risk. Even if you have loans to pay or any other obligations, at a minimum contribute enough to get the full employer match

2. The power of compounding #

    Now, this is where we start getting to the really important part. Missing the employer matching will cost you thousands of dollars but not starting contributions early and losing out on 5-10 investment years is where the difference will be in hundreds of thousands of dollars.

To clarify where this large a difference comes from, we’ll consider a couple of simple examples. In both examples we’ll contribute 500$ a month, assume the retirement age is 65 for both, the rate of return on their investment is the same at 7% annually. The difference is going to be in the time horizons for investment.

• Person A starts contributing at age 25 and contributes 500$ a month until age 65 and thus invests for 40 years.

• Person B starts contributing at age 35 and contributes 500$ a month until age 65 and thus invests for 30 years.

Naturally Person A would’ve invested $60,000 more than Person B since they’ve been contributing for 10 more years. So you’d expect that the balance for person A would be 60k more, but as the images below show, the additional 10 years would actually result in Person A having almost $600,000 more than Person B in their retirement account.

You can confirm these numbers by using this compound interest calculator. Put 500$ as a monthly contribution and the length of time in years, with an estimated interest rate of 7%.