I want to talk about how to fund your retirement and the importance of starting out early. Once again, I want to remind everyone reading these that the articles are designed for the novice investor. I encourage veterans of the sport to read them and email me any ideas or arguments, but most of the information will be aimed towards the beginner. That being said, lets talk about retirement.
Providing for your retirement is the number one priority of your investing career. However, funding your retirement is hard to do when you are young, especially if you're younger than 25. That being said, investing as soon as possible is the best decision you will ever make in your life. The earlier you start, the higher the proceeds. We all want the Ferrari 355 in the driveway and the house looking over the ocean (at least I do), but before all that we must provide for ourselves. You do not want to die broke, or retire with only enough money to feed yourself, with nothing left for fun. The funny thing about investing for the long term is that your value increases at an increasing rate. Let me tell you about the basic rule of how money that earns interest increases over time.
The Rule of 72 is a simple compound interest formula that tells you about how long it will take a set amount of money to double at a given interest rate. You simply divide the interest rate you are getting (or expect to get over the long term) into 72 and out shoots the number of years it will take your money to double. For example, at a 12% interest rate (the S&P 500 has averaged 10.83% since 1957) you can expect your money to double in 6 years, 72 / 12 = 6. If you plan on receiving an interest rate of 6% your money will double in 12 years, 72 / 6 = 12. This formula is incredibly simple and illustrates why it is important to start early and how your money increases at an increasing rate, let me show you.
Over your lifetime you can expect to work for about 40 years. For the purposes of simplicity lets assume 42 years which will allow our money to double 7 times cleanly. Starting with an initial principle of $2000.00 dollars at an interest rate of 12% and an age of 18, your money will first double when you turn 24….
Age Worth (Dollars)
- 2,000
- 4,000
- 8,000
- 16,000
- 32,000
- 64,000
- 128,000
- 256,000
By the age of 60 your $2000 will have grown to $256,000.00. Just by letting $2,000.00 sit for 42 years and not using it to buy a supercharger or a slightly nicer car you can start your retirement with an extra quarter million. Keep in mind that when saving for your retirement you will be adding to this, growing your net worth even faster. The formula only illustrates a set amount and not an increasing amount. This example further demonstrates the most important point of our discussion, starting early. The longer you expose yourself to the market the more rewards you will reap. If, in this example we had waited to start investing for just six years, or 14% of the 42 years, it would have cost us $128,000.00 dollars, or 50% of our worth. Now imagine if you let it sit for another 6 years, with $512,000.00 you can buy a lot of house or a Ferrari F40.
All of this being said; a lot of us don't have $2,000 to forget about right now. I want to show you a few numbers that demonstrate how a little bit a month can grow over time. Lets start with no initial investment but setting aside $250.00 a month over a period of 30 and 40 years.
Years Interest Worth
30 4% 174,012.48
30 8% 375,832.85
30 12% 889,619.62
40 4% 296,477.33
40 8% 882,291.99
40 12% 3,010,860.41
As you can see getting a good rate of return is very important to growing your retirement fund, but even more, look at the difference between growing your money for 30 years vs. 40 years. At 12% for 30 years you'll make about $889,000.00. By letting what you've invested grow for just 10 more years you more than triple your worth. It works out that 3.01 million dollars is almost 3.4 times as much as $889 thousand. What's important to take away from this lesson is that it is very possible to make this happen, it's not a pipedream. I encourage you to call any local broker or banker in your area and tell them you want to open an investment account and that your goal is 12% a year for over 30 to 40 years. They won't have a problem with it. Also as important, in this example it didn't take heavy cash flow on our part, $250.00 a month is a speed bump not a brick wall. However, I do understand that sometimes, especially when you're young, $250.00 can seem like an obstacle. That's fine, start small. Put $100.00 or $50.00 a month aside, it still grows and gets you in the habit of setting money aside for the future. Even though it's not that much you're still building for the future and that's never a bad thing.
