What it takes
How you invest will depend on your level of risk tolerance. Generally, the higher the potential for gains, the more risk an investment involves. How do you feel about risk? Will you be able to ride out periodic and inevitable investing declines, or will you want to duck for cover?
If you can stomach a lot of risk, your portfolio can be more aggressive. Although past performance doesn't guarantee future results, growth-oriented stock focused portfolios have been shown to produce higher returns over the long term and could be suitable for investors with a high risk tolerance.
Here’s a hypothetical example that drives home the point that the more time you have, the less you have to put away each month to reach your goals: Emily is 25. By saving $440 a month, her nest egg will top $1 million by the time she’s 67, assuming a 6% average annual return on her investments.
Her 25-year-old friend Elliot, on the other hand, decides to wait five years before investing. He’ll need to put aside $613 a month, assuming a 7% annual rate of return, to have the same portfolio at age 67. In the end, Emily will have paid $50,412 less for her $1 million nest egg.
Just five short years can make a big difference. That’s quite an incentive to start saving at as young an age as possible, isn’t it?