Let’s look at what happens if you invest $100 every month for twenty years with a 7% return. At the end of 20 years, you will have paid in $24,000, but you will have $52,093 in your account. What if instead you leave the money untouched for thirty years? Still investing $100 per month, the investment pool will have grown to $121,997.10. Not bad. Let’s see, we put aside $100 per month for 360 months, which would be $36,000. But our $100 a month investment earns almost $86,000, more than double the amount we put in!
How much would be there if the program runs for 40 years? The investment pool is now up to $262,481.34. Let’s see, we put aside $100 per month for 480 months, which would be $48,000. But our $100 a month investment earned almost $215,000! $262,500 invested at 7% would give an annual income of $18,375 per year without touching the investment pool. If only social security were so good.
If you start at 20, at 60 you can have that income. Starting at 30 would allow withdrawal at 70. 40 would be at 80, etc. It is easy to see that the earlier the program is started, the earlier you can withdraw. But a program at 50 will still get you there at 80, particularly if you double the money to $200. Just $200 a month, beginning at 50, will give you almost $244,000 at age 80 when you would really need it. (What could happen if we were able to invest even more?)
If I were king, I’d tell those running schools from elementary until high school, to teach this one lesson would be over and over again until it became literally part of the students’ psyches. Projects in school would be done to demonstrate that lesson over and over and over.
Richard Russell in his newsletter, Dow Theory, gives the example of a 19 year old who opens an IRA with $2,000 at an average growth rate of 10% (7% interest plus growth). After seven years this fellow makes no more contributions. A second investor waits until age 26 (seven years later). He also makes $2,000 contributions but he continues to do so faithfully until age 65 and gets the same return. Our first investor ends up with more money than the investor who contributes for the entire time. The compounding effect of the additional 7 years is phenomenal.
Note for Grandparents: Think about what would happen if you funded a Roth IRA for $2,000 per year for your grandchild for seven consecutive years and the money grows untouched until the grandchild is 55 years old. If the investment began at age 5, it would have grown to hundreds of thousands of dollars!
Let’s take a look at this from a different angle, especially if you don’t have enough money to invest. Most people have the expectation of working from the time they are 25 until at least 55 years old. Assuming a good education, many people would expect to make an average of $50,000 per year over that work life.
Total Years Worked: 30
Average Earnings per Year: $50,000.00
Total Money Earned: $1,500,000.00
Most People will have saved: $30,000.00
Amount Spent: $1,470,000.00
It is unlikely that any of us given $1,500,000 would give away $1,470,000 and only keep $30,000. Amazingly though, when we don’t plan to accumulate wealth from the earliest part of our income generating careers, that is exactly what happens.
Let me tell you a quick story of my friend Bob. A few years ago, when he was 45, Bob said to me that he would like to go to law school, but if he did, he would be 48 when he finished in three years. I asked him how old he would be in three years if he didn’t go to law school.
So even if you are way past 25, start today! When you retire, you will be way ahead of where you will be if you don’t start today.