The Most Important Step When Saving for Retirement

A recent survey from Vanguard showed the median account balance for Americans 65 and older was just $87,700. The median amount saved by Americans aged 55 to 64 was just $89,700. The average for both age groups was much higher at $256 thousand for 55 to 64-year-olds and $280 thousand for those 65 and older.

However, these numbers are very concerning, considering these individuals are either in retirement or near retirement age and don't have enough saved up to retire.

The reality is that while the amount of money those in their 50s, 60s, and older have saved for retirement is not likely enough to give them the retirement that many of us dream about, there is not much we can do to help them at this point.

Many of the greatest investors of our time have all used the power of compounding returns to grow their vast fortunes. Warren Buffet, one of the wealthiest individuals in the world, while an outstanding investor in his own right, acquired the vast majority of his wealth late in life because of the power of compounding returns, not extraordinary investment picks.

Unfortunately, those in their 50s or older just don't have as much time on their side as is required to realize the power of compounding investment returns.

While the younger generations have more time and opportunities to grow their investment wealth, the issue is that many young people don't understand the importance of investing when young. A recent report from Morning Consult showed that half of Americans aged 18 to 34 were not yet saving for retirement, and only 39% of those who were, started in their 20s.

We often hear the same old lines from those who now wish they had saved or even just started investing earlier in life. "I was never told/taught about investing." "No one explained why investing young was crucial to growing a large investment account." "I just didn't have enough money to save when I was young/younger." There are obviously more excuses, but in my experience, these are the top three.

If you are reading this article, you care about your investments. Therefore, you either had someone explain to you the importance of investing, or you taught yourself after realizing why investing was so important.

Regardless, the most crucial step when it comes to saving for retirement isn't where you put your money or even how much you invest; it's having a conversation with someone about saving and investing for retirement.

The earlier in life that someone is taught about retirement savings and why it is so important to save even a tiny amount at an early age, the better off they will be when they retire.

For example; if you invested just $4,500 per year for 45 years, you would have over $1 million, and if that 20-year-old had an employee who did a 401k match, they might only have to save $2,250 per year (employer matching the other $2,500) and still end up with the $1million.

Another way to think about compounding returns is this. If you contribute $1 at the age of 20 and get a 4% return rate, that $1 would be worth $5.84 when you turn 65. (figures are based on zero inflation and illustrate the power of compounding returns, not purchasing power over time.) If you contribute $1 at the age of 30, it will be worth just $3,95 when you turn 65. $1 at the age of 40 will be worth just $2.67 at 65. $1 invested at age 50 will only grow to be worth $1.80 by turning 65.

When investing, time is your friend if you are young and your enemy if you are older. So be a friend to someone else and make the biggest impact on their life as early as you can, by simply talking to them about investing and explaining the importance of starting early. So the sooner someone starts, the more they will need to invest in getting to $1 million.

If you need suggestions about what they should buy, keep it simple, recommend the iShares Core S&P 500 ETF (IVV), the Vanguard Russell 2000 ETF (VTWO), or the Vanguard Total Stock Market ETF (VTI). These are basic, straightforward investments that will allow anyone to benefit from the stock market's compounding returns.

Matt Thalman Contributor
Follow me on Twitter @mthalman5513

Disclosure: This contributor did not hold a position in any investment mentioned above at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from for their opinion.