Why Saving for Retirement Should Start Now: A Guide for Teens and Young Adults

Hey there! Let’s talk about something that might sound a bit boring but is actually super important: saving money for retirement. I know, retirement feels like a lifetime away, but starting now can make a massive difference in your future.  I was fortunate back when I was a young teenager that my father took the time to teach me the importance of saving my money for the future and not spending everything I made.  He also taught me that money doesn’t grow on trees and while I’d have to work hard to make money, I should also let my money work for me (more on that later!)   So, let’s dive into why saving for retirement is essential and how you can start building a million-dollar nest egg today.

The Importance of Saving for Retirement

Imagine this: you’re 65, relaxing on a beach, sipping on a cold drink, and not worrying about money at all. Sounds great, right? That’s what saving for retirement can help you achieve. When you start saving early, you’re giving your money time to grow and work for you. Plus, you’ll have a cushion for emergencies and can enjoy a comfortable lifestyle without financial stress.

Let’s go over a few key principles for saving money:

  1. Start Early: The earlier you start saving, the more time your money has to grow. Even small amounts can add up over time thanks to the magic of compounding.
  2. Budget Wisely: Keep track of your income and expenses. Make a budget and stick to it (check out MFF’s budget calculator). This will help you find areas where you can cut back and save more.
  3. Set Goals: Define what you’re saving for. Whether it’s a car, college, or retirement, having clear goals keeps you motivated.
  4. Automate Savings: Set up automatic transfers to your savings account.  Alternatively, or in addition to adding to your savings account, contribute to your workplace 401(k) if one is available.   Money for a 401(k) will automatically be taken out of your check (plus if your employer offers a 401(k) match, that will be added too).  This way, you won’t be tempted to spend the money you should be saving.

Understanding Dollar Cost Averaging

Dollar cost averaging (DCA) is a smart way to invest your money. I know investing might sound complicated, but DCA is a simple strategy that even beginners can use to start growing their money.  Instead of investing a large amount all at once, you invest smaller amounts regularly over time. This strategy can help reduce the impact of market volatility. For example, if you invest $100 every month, sometimes you’ll buy when prices are high, and other times when prices are low, balancing out your investment over time.

So, why should you DCA anyway?  Here’s three main reasons:

  1. Reduces Risk: By investing regularly, you lower the risk of investing all your money at a peak when prices are high.
  2. Removes Emotion: You stick to a plan and avoid making emotional decisions based on short-term market movements.
  3. Builds Discipline: It encourages a habit of regular saving and investing, which is crucial for long-term financial health.

Now, let’s look at an example to help understand how it works:

Imagine you have $1,200 to invest in a stock over the next 12 months. Instead of investing the entire $1,200 at once, you decide to use dollar cost averaging and invest $100 each month.

Example 1: Stock Prices Fluctuate Over the Year

  • January: Stock price = $10, you buy 10 shares ($100 / $10)
  • February: Stock price = $12, you buy 8.33 shares ($100 / $12)
  • March: Stock price = $8, you buy 12.5 shares ($100 / $8)
  • April: Stock price = $9, you buy 11.11 shares ($100 / $9)
  • May: Stock price = $11, you buy 9.09 shares ($100 / $11)
  • June: Stock price = $7, you buy 14.29 shares ($100 / $7)
  • July: Stock price = $8, you buy 12.5 shares ($100 / $8)
  • August: Stock price = $10, you buy 10 shares ($100 / $10)
  • September: Stock price = $9, you buy 11.11 shares ($100 / $9)
  • October: Stock price = $11, you buy 9.09 shares ($100 / $11)
  • November: Stock price = $12, you buy 8.33 shares ($100 / $12)
  • December: Stock price = $10, you buy 10 shares ($100 / $10)

After 12 months, you’ve invested $1,200. Let’s add up all the shares you bought:

10 + 8.33 + 12.5 + 11.11 + 9.09 + 14.29 + 12.5 + 10 + 11.11 + 9.09 + 8.33 + 10 = 126.35 shares

The average price you paid per share is your total investment divided by the total number of shares:

$1,200 / 126.35 = $9.50 per share

Even though the stock price fluctuated between $7 and $12, you ended up paying an average of $9.50 per share by spreading out your investments.

Example 2: Comparing Lump Sum vs. Dollar Cost Averaging

Let’s say you had invested the entire $1,200 in January when the stock price was $10. You would have bought:

$1,200 / $10 = 120 shares

By using dollar cost averaging in the previous example, you ended up with 126.35 shares instead of 120 shares. This shows how DCA can help you accumulate more shares over time, especially in a fluctuating market.

The Power of Compounding Money

Compounding is like magic for your money. When you invest or save, you earn interest on your initial amount and then earn interest on your interest. Over time, this snowball effect can turn small savings into a substantial amount. Understanding how compounding works can help you make smart financial decisions now that will pay off big time in the future.

Let’s break it down with a simple example. Imagine you have $100 and you invest it in a savings account that earns 5% interest per year. Here’s how compounding works over a few years:

  • Year 1: You start with $100. With 5% interest, you earn $5. So, at the end of the year, you have $105.
  • Year 2: You start with $105. With 5% interest, you earn $5.25 (5% of $105). Now you have $110.25.
  • Year 3: You start with $110.25. With 5% interest, you earn $5.51 (5% of $110.25). Now you have $115.76.

Notice how each year, you earn more interest than the year before? That’s because you’re earning interest not just on your initial $100, but also on the interest that has been added to it.

The real magic of compounding happens over long periods. The earlier you start, the more time your money has to grow. Here’s an example to show you just how powerful compounding can be over time:

Example 1: Starting Early

Imagine you start saving $50 a month at age 15 and continue until you’re 65. If your savings earn an average of 7% per year, let’s see how much you’ll have:

  • Total amount saved (without interest): $50 x 12 months x 50 years = $30,000
  • Total amount with compounding interest: About $292,000

By starting at age 15, you end up with almost ten times the amount you actually saved, thanks to compounding!

Example 2: Starting Later

Now, let’s say you wait until you’re 30 to start saving $50 a month, and you continue until you’re 65. Here’s how it breaks down:

  • Total amount saved (without interest): $50 x 12 months x 35 years = $21,000
  • Total amount with compounding interest: About $88,000

By starting 15 years later, you end up with much less money, even though you saved for 35 years.

Compounding is a powerful tool that can turn small, regular savings into a substantial sum over time. By understanding and harnessing the power of compounding, you can set yourself up for a financially secure future. Start early, be consistent, and let your money work for you. The future you will thank you!

How to Save Over a Million Dollars

Ready to talk about something super exciting?   How you can save over a million dollars by the time you retire.  It might sound like a huge number, but with smart planning and a bit of patience, it’s totally achievable. Here’s how you can make it happen.

Step 1: Start Early

The key to saving a million dollars is to start as early as possible. The earlier you start, the more time your money has to grow through the power of compounding. Compounding is when your money earns interest, and then that interest earns interest, and so on.

Step 2: Save Consistently

Consistency is crucial. Even if you can only save a small amount each month, those savings will add up over time. Let’s break it down with some examples:

Example 1: Saving $100 per Month

Let’s say you start saving $100 per month at age 18 and continue until you’re 65. If your investments earn an average annual return of 7%, here’s how much you’ll have:

  • Monthly Savings: $100
  • Years of Saving: 65 – 18 = 47 years
  • Annual Return: 7%

Using a compound interest calculator, we find that by the time you’re 65, you’ll have about $384,000. That’s a great start, but let’s see how we can reach a million dollars.

Example 2: Increasing Your Savings Over Time

As you get older, you’ll likely earn more money. If you increase your savings as your income grows, you can reach your goal faster. Let’s say you start saving $100 per month at age 18 and increase your savings by $50 every five years.

  • Ages 18-22: Save $100 per month
  • Ages 23-27: Save $150 per month
  • Ages 28-32: Save $200 per month
  • Ages 33-37: Save $250 per month
  • And so on

Using the same 7% annual return, this strategy would grow your savings to about $1.2 million by the time you’re 65. That’s the power of increasing your contributions over time!

Step 3: Take Advantage of Employer Match Programs

If you have a job that offers a 401(k) or similar retirement plan with an employer match, take full advantage of it. An employer match is essentially free money that can significantly boost your savings.

For example, if your employer matches 50% of your contributions up to 6% of your salary, and you earn $40,000 per year, contributing 6% of your salary ($2,400) would get you an additional $1,200 from your employer each year.

Step 4: Invest Wisely

Investing your money wisely is crucial for reaching your million-dollar goal. Here are some tips:

  1. Diversify: Spread your money across different types of investments to reduce risk.
  2. Low-Cost Index Funds: Consider investing in low-cost index funds, which track the performance of a market index like the S&P 500.
  3. Stay Consistent: Stick to your investment plan, even during market downturns. Over the long term, the market tends to go up.
Example 3: Using a 401(k) and IRA

Let’s combine everything we’ve discussed so far. Assume you start working at age 22, earning $40,000 per year, and you contribute 10% of your salary to a 401(k) with a 50% employer match up to 6% of your salary. You also open a Roth IRA and contribute $3,000 annually.

  • 401(k) Contributions: 10% of $40,000 = $4,000 per year
  • Employer Match: 50% of 6% of $40,000 = $1,200 per year
  • Total Annual 401(k) Contributions: $4,000 + $1,200 = $5,200
  • Annual Roth IRA Contributions: $3,000
  • Total Annual Savings: $5,200 + $3,000 = $8,200

Assuming an average annual return of 7%, by the time you’re 65, you’ll have:

  • 401(k): Approximately $1,115,000
  • Roth IRA: Approximately $625,000

Combined, this totals $1,740,000. That’s well over a million dollars!

Step 5: Keep Learning and Adjusting

Financial education is ongoing. Keep learning about personal finance, investing, and retirement planning. As you get older and your financial situation changes, adjust your savings and investment strategies accordingly.

Saving a million dollars by retirement is achievable if you start early, save consistently, take advantage of employer matches, and invest wisely. By following these steps and staying disciplined, you can set yourself up for a comfortable and financially secure future. Start today, and watch your savings grow!


Saving for retirement might not seem urgent now, but starting early can set you up for a comfortable and stress-free future. By understanding and applying principles like dollar cost averaging and compounding, you can build a substantial nest egg. So, take that first step, set your goals, and start saving today. Your future self will thank you!

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