What it takes
How you invest will often 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 is not indicative of future results, growth-oriented, stock portfolios have been shown to produce higher returns over the long term, and could be suitable for investors with high-risk tolerance.
And, again, the more time you have, the less you could have to put away each month to reach your goals.
Here’s a hypothetical example: Emily is 25. By saving $420 a month, her nest egg will grow to $1 million by the time she is 65, assuming a 7% average annual return on her investments.
Her friend Elliot, on the other hand, decides to wait five years before investing. He’ll need to put aside $607 a month assuming a 7% annual rate of return to have the same portfolio at age 65. In the end, Emily will have paid $89,000 less for her $1 million nest egg.
Just five short years can make quite a difference. That's quite an incentive to start saving at as young an age as possible, isn't it?