When Is $30K Worth $90K? When You Save It In Your 20s

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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).

Of course, different assumed returns would change the grand total, but lower or higher rates don't change the fundamental principal: Dollars saved in your 20s are worth a lot more than dollars saved later in life.

"It's counterintuitive for people to open up their time horizons, but the difference it makes is incredible," Weston said. "We focus on our immediate past and present at the expense of the future."

And that can get pretty expensive. Thanks to compounding returns, every $1,000 that someone in their 20s doesn't save costs them more than $10,000 at retirement.

'Hard to catch up'

"You rob the money of time to earn returns, and time for those returns to earn returns," she said. "If you put it off, it gets increasingly hard to catch up."

Not surprisingly, U.S. workers often have it backward. Most people save a little for retirement when they are young, and increase participation and contributions as they get older. A study by Aon Hewitt in 2010 found that Generation Y workers (under age 30) average 5.3 percent contributions to their 401(k) plans, as compared to 6.8 percent by Gen X workers (31-45) and 8.4 percent by older workers. Those older workers are trying to catch up, but probably wish someone had told them the Parable of the Twins when they were younger.

No one who tells the parable thinks it's a good idea to stop saving for retirement at age 30, of course. But it does happen. When young adults start families, take on mortgages, and face other life hurdles, sometimes retirement contributions are the first to go overboard. Workers who have saved a lot in their 20s are in a much better position to weather a storm and still have a retirement savings cushion.

Weston is among those personal finance experts who think young adults and families focus too much on paying off debt at the expense of saving for retirement. Debt payments and retirement savings should be balanced, she believes.

The instant payoff of paying down a 15 percent interest credit card balance is obvious, but in the long run, $1,000 saved for 30 years in an IRA can be far more valuable ($10,935) than the cost of carrying $1,000 in debt for an extra year or so ($150).

That outlook holds for student loan debt, too. Pay down the debt, of course, but don't neglect retirement savings just to pay extra to reduce a student loan balance, Weston says.

She thinks the best thing recent graduates can do is avoid the urge to splurge.

"Continue living like a broke college kid for a few years and save the money. You will be amazed at what the difference is," Weston said.