When I was in my late teens, my father shared with me some retirement savings advice that was so compelling that I said, “I need to start investing today!” and I while I didn’t really know how to start investing, I did some basic research with “Value Line”, sought out an actual broker (this was before you could invest online) and bought my first stock (Philip Morris if you can believe it). What he said sounded too good to be true, and counter intuitive, for a highschooler who had been well-versed in math and calculus, but completely naive to real world investing and financial modeling. He said,
“If you started investing at age 25 and put the same amount of money into stocks until age 35, you’d have more money at retirement than if you started saving at 35 and invested the same amount of money in stocks EVERY YEAR until retirement”
So, putting $5000 a year away from 25 to 35 yields more than putting $5000 a year away from 35 to 60?
Yes, here’s the data. It’s just as compelling when running out to 65, but most people like to at least plan for a retirement earlier than 65 these days, I used 60 for my retirement investing model. And it works with any annual amount. The trick is the annual return of course. If you cherry-picked a horrendous investing period by starting 10 years ago, you didn’t earn the long-run 8-10% return that the stock market returns when accounting for dividend reinvestment. However, after the recent precipitous decline in equities, it’s probably not unreasonable to assume that you could earn 8% per year from here over a 20-30 year period given the other hundred + years of data supporting this trend. I utilized 8% which is at the low end of the oft-quoted 8-10% estimates in the literature.
Here’s a graphical representation fo the difference between starting to invest at 25 years old vs. starting to invest at 35 years old.
Outcome of starting to invest early:
The 25 year old starter invests $55,000 and ends up with $615,580 at retirement.
The 35 year old starter invests $130,000 and still has less at retirement: $431,754.
So, if you’re a young saver questioning the value of starting this early (hopefully upon reading this, if you’re not already doing so, you’ll start investing today!), if you’re the proud parent of a young adult just entering the workforce, or if you’re trying to teach your college kid some college financial tips, please share this article or follow my future articles in RSS (what is RSS?).
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