My niece, who is in her early 20s, asked whether it is too early to start saving for retirement.

To answer her question I just ran some simple math. First of all some assumptions: she would need money in 42 years, annual average rate of return on retirement savings is 8%, and inflation is 3% per year.

Scenario 1. She does not save for retirement for the next 12 years and then she would save $10,000 per year increasing it at rate for inflation (3%). In 42 years she might save $513,000 (in today's dollars it is about $150,000).

Scenario 2. She saves $2,000 for next 2 years (she will be in grad school with minimal income), then $5,000 per year increasing it at rate for inflation until she is ready to retire in 42 years. She would save $1,891,000 (in today's dollars it is about $550,000).

As you can see in the second scenario she would accumulate about three times as much money comparing with the first one by just saving earlier. It would allow her withdrawing $25-33K a year in retirement (in today's dollars) relatively safely. This would be my advice to her for right now.

Is it realistic? I think so. In two years when she finishes her Masters Degree most likely she will find a job that might pay around $50,000. So her retirement contributions would be about 10% from her pay.

You can say that maybe it is not enough. And I am not disagreeing with you. In my opinion this plan will enable my niece to get a habit of saving. The near term results (for next several years) are quite achievable adding to retirement savings little by little. She would see the results and get first hand experience with investing and compounding interest when money grows exponentially within no more than 10 years. When time flies by the plan will change. Most likely her income will grow, her lifestyle will change, she might get married, have kids, have mortgage and so on but she would feel better that her retirement savings are taken care.

Alex Medvedovski