Recent college graduates who score their first job might be tempted to splurge on a new car or an apartment that's a little out of their price range. But 20-somethings are in an incredibly unique position to set up their financial future, if only they could teach themselves to think backward about retirement savings .
It sounds like a math trick, but it's really just harnessing the power of time: Someone who saves for retirement during their 20s and completely stops a decade later will have more at age 62 than someone who starts saving in their 30s and spends the rest of his or her adult life trying to catch up. Yes, 10 years of savings can be worth more than 30 years of savings. This may be the only time when something that sounds too good to be true really is true.
If you know someone who's recently graduated or started a first job, sit them down and show them what personal finance advisers call "The Parable of the Twins."
Liz Weston, in her book "Deal with Your Debt," offers this simple illustration. One twin puts aside $3,000 every year in a Roth IRA starting at age 22, and stops at 32. She never adds another penny. Her brother starts saving $3,000 annually at 32, and continues until age 62. Who has a larger retirement kitty?
Assuming an average 8 percent return annually, the twin sister wins rather handily. She has $437,320, compared to her brother's $339,850, even though she contributed two-thirds less of her own money than her brother ($30,000 vs. $90,000).