Business Insider recently posted a video in which author James Altucher argued that young people should avoid 401(k) plans, and instead focus on "investing in themselves."
This might not, in fact, be the best advice for people in their twenties and thirties who want to eventually retire.
Jack Otter wrote a rebuttal in Barron's against Altucher's comments that points out several problems with the advice for young people to not invest in a retirement plan.
One of Otter's observations stands out as by far the most important issue with Altucher's argument, and as the biggest reason why you should start saving early: compound interest.
The earlier you begin saving for retirement, the more you can take advantage of compounding. The money that you start saving in your twenties will start accruing interest, and then that interest will accrue interest of its own, leading to an exponential growth in the size of your account.
To see why it's a good idea to start saving in your 20s, consider the following thought experiment.
We have three investors who take different approaches to retirement saving:
Our first investor starts saving $300 per month at the age of 25
The second follows Altucher's advice, waits ten years, and starts saving $300 per month at 35
The third investor waits even longer and starts saving at 40, but in order to try to catch up, puts $600 into her account each month
This might not, in fact, be the best advice for people in their twenties and thirties who want to eventually retire.
Jack Otter wrote a rebuttal in Barron's against Altucher's comments that points out several problems with the advice for young people to not invest in a retirement plan.
One of Otter's observations stands out as by far the most important issue with Altucher's argument, and as the biggest reason why you should start saving early: compound interest.
The earlier you begin saving for retirement, the more you can take advantage of compounding. The money that you start saving in your twenties will start accruing interest, and then that interest will accrue interest of its own, leading to an exponential growth in the size of your account.
To see why it's a good idea to start saving in your 20s, consider the following thought experiment.
We have three investors who take different approaches to retirement saving:
Our first investor starts saving $300 per month at the age of 25
The second follows Altucher's advice, waits ten years, and starts saving $300 per month at 35
The third investor waits even longer and starts saving at 40, but in order to try to catch up, puts $600 into her account each month
