NEW YORK (TheStreet) -- Think fast: What's the most important rule in retirement investing?
Easy: Save as much as you can as early as you can.
The problem is that this rule can be kind of discouraging. We'd all just love to save a bundle in our 20s to give our investments four or five decades of compounding. But young people often don't earn much when they're just starting out, and they have lots of competing demands for cash -- getting that first car, building a down payment for a home, paying off student loans.
So as a practical matter, many people can't get serious about investing before their 40s. How much headway do they lose?
It may seem surprising, but a late start might not be the catastrophe you'd think if sound preparation allows the midlife investor to set aside a lot more than a 20-something can. For many people, that's quite possible if income has gone up and expenses have been kept under control. By midlife, expenses such as child rearing and accumulating a home down payment may be in the past.
So let's look at some numbers generated by the Savings, Taxes and Inflation Calculator:
Imagine that at age 25 you set aside $100 a month for retirement and that it grew at 8% a year. In 40 years that $100 would become $2,172. Save $100 every month and you'd have a pretty nice nest egg, though inflation and taxes would hurt.
Now fast-forward to age 45. You make more money and you've kept your expenses under control, so suppose you could save $500 a month and earn the same 8%. At age 65, after 20 years, that $500 would grow to $2,330. Not bad.
There's no denying that saving at 25 is better. But saving that larger sum can really help offset the lost headway. So can postponing retirement. Work to 70 instead of 65 and the $500 saved at age 45 would grow to $3,424.
A 40-something investor is still young enough to emphasize stocks, which have traditionally returned more than the bonds and cash that many older investors prefer. Wait until 55 to start saving and things would indeed be difficult, because you'd have so little time to compound and might have lower returns if you were unwilling to risk as much in stocks.
But is it realistic to think you could save five times as much at 45 than at 25? It's quite possible. Many people, of course, earn more as their careers advance. Your income would not have to quintuple to boost savings this much, so long as the difference between what you earned and spent got that much larger. That could happen if you refrained from boosting your spending to match every raise.
In fact, it would not be that surprising for a person who'd saved $100 or less per month at 25 to save $1,000 or more every month after turning 45, making up easily for the ground lost.
In real life, of course, $500 saved at 45 is not really five times as much as $100 saved at 25, because inflation would undermine the buying power of every dollar. There's just no doubt that saving early is better than saving late.
But people who just aren't able to save much when they are young need not give up hope.