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The Power of Starting Your 401(k) Early and Letting It Grow

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  • Post last modified:September 6, 2024

When it comes to planning for retirement, there’s one piece of advice that experts agree on: the earlier you start saving, the better. Your 401(k) is one of the most powerful tools you have to secure your financial future, and getting started as early as possible can make a huge difference down the road. There is so much power behind starting your 401(k) early and letting it grow over time.

But just as important as starting early is leaving your 401(k) alone and letting it grow. Here’s why starting early and staying the course can give you a strong advantage.


1. The Power of Compound Growth and Starting Early

One of the biggest reasons to start your 401(k) early is to take full advantage of compound growth. Compound growth means that your money earns interest, and over time, that interest starts earning interest as well. It’s like a snowball effect—your retirement savings grow faster the longer they’re invested.

For example, at an 11% growth rate (The average SMP 500 growth since inception):

  • An 18-year-old making $25,000 per year and investing 5% of their income could grow their 401(k) to approximately $1.52 million by the time they reach 65.
  • A 25-year-old earning $40,000 per year and investing 5% of their income might accumulate around $1.16 million.
  • A 45-year-old earning $120,000 per year and investing 10% of their income could have about $770,000 saved by retirement.

As these examples show, the earlier you start, the more time your money has to grow and compound. The 18-year-old benefits significantly from those extra years of growth, even with a smaller income and contribution rate. According to this study, the average American only has $272,000 in their 401k by the age of 65, don’t get left behind! By leveraging the power of starting your 401(k) early and letting it grow, even with smaller contributions you can grow substantial wealth.

https://institutional.vanguard.com/content/dam/inst/iig-transformation/insights/pdf/2024/has/how_america_saves_report_2024.pdf


2. Employer Matching is Free Money

Many employers offer a 401(k) match, which is essentially free money for your retirement. For example, your employer might match 50% of the first 6% you contribute to your 401(k). This is an instant return on your investment, so it’s wise to contribute at least enough to get the full match.

By starting early, you take advantage of this match for more years, allowing your savings to grow even more. Plus, you don’t want to miss out on the opportunity to build up your 401(k) with free money from your employer.


3. Don’t Try to Time the Market—Just Keep Contributing

One mistake that new investors sometimes make is trying to “time the market”—in other words, they stop contributing when the market is down or move money out of their 401(k) in fear of losing money. The problem with this approach is that no one can accurately predict when the market will go up or down. Trying to guess can result in missing out on periods of growth.

The key to long-term success is consistency. No matter what’s happening in the market, continue contributing to your 401(k). By investing regularly over time, you’ll buy into the market at both high and low points, which helps balance out risk. This strategy, known as dollar-cost averaging, ensures you’re always working toward your retirement goals.


4. Leave It Alone!

The temptation to withdraw money from your 401(k) early can be strong, especially when life gets tough. However, it’s crucial to resist the urge. When you withdraw early, not only do you lose the power of compound growth, but you’ll also face penalties and taxes on the money you take out.

Your 401(k) is designed to grow over decades, so it’s best to leave it alone and let time do its work. With patience, your account will grow larger than you may think possible when you first start contributing. Remember, the longer your money stays invested, the more it grows.


5. Retirement Might Seem Far Away, But the Future Comes Fast

When you’re young, retirement can seem like a distant concern, but time passes faster than you realize. The small amounts you contribute today will have a huge impact on your comfort and security in retirement. By starting now and sticking with it, you’re setting yourself up for a more relaxed, financially stable future.


Conclusion: Start Early, Stay Consistent, and Let It Grow

Starting your 401(k) early and leaving it alone is one of the smartest financial decisions you can make. By harnessing the power of compound growth, taking advantage of employer matching, and staying committed through market ups and downs, you’re putting yourself on the path to a secure retirement. The earlier you start, the better, and the more you let your money grow undisturbed, the bigger the reward in the end. That is the power of starting your 401(k) early and letting it grow.

If you are wondering how you can afford to make the extra payments to your 401k, check out this article on different debt repayment methods and which one might work for you.

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