Thoughts From The Farm, 3/08/17

There is an old saying that “youth is wasted on the young”.  I don’t believe that, but I do think that young people, under the age of 35, waste away the most important advantage in building wealth:

Time.

In fact, if young people wanted to have a secure financial future, and knew how easy it was to become at least a “millionaire” by retirement, they would follow a simple path, regardless of their job or career path.

Save $5,000 a year ($600 a month) in a tax-advantage investment vehicle, usually a 401K or IRA between the age of 25 and 35.

How do struggling young people come up with $600 a month?

Plan, prioritize, and cut other expenses to carve out the cash.  It is very doable.  When I was in the Army making a very modest income in the 1990s, I was saving that amount per month.  Blog Post: Climb The Mountain One Step At A Time 

Additionally, if you are employed by a corporation, they will likely match funds, sometimes 100% on a portion of your savings.

The important point is time.  The earlier you start, the less you need to save for retirement.  Why?

Compounding Interest.

“My wealth has come from a combination of living in America, some lucky genes, and compound interest”.  Warren Buffett

For a 10 year period, save $5,000 per year in a retirement vehicle made up of the U.S. stock market index, which historically has yielded at least an average of 8% per year.  Now, observe the differences over time in the following scenarios.

If you invest from age 25 to 35, and then no more contributions, you will retire with close to $800,00 at age 65.

Invest from age 35 to 45, and then no more contributions, and retire with close to $375,000.

Invest from age 45 to 55, then no more contributions, and retire with close to $170,000.

Invest from age 55 to 65, then no more contributions, and retire with close to $80,000.

You get it.  Timing is everything, because it smooths out market volatility, and provides plenty of compounding to occur.

So why wouldn’t young people sock it away early?

Some question if 8% annual returns are realistic.  However, check out this rolling 30 year stock market return article.   Pick any 30 year period since 1926, and your returns would be at least 8% per year if you remained invested.

Some question whether it is the right moment to invest.  The key is that with enough time (40 years), young people don’t need to be savvy investors.  Middle aged folks trying to catch up, have a greater risk of picking the wrong entry point on a shorter timeline to retirement.

It’s also tough for a young person to focus on a goal that won’t be realized for four decades, especially when you are only “two and half” decades old.

However, IF you do follow this plan, you will be in the group of people who are financially secure at retirement when needed the most.

P.S. Are you a parent planning a wedding or trying to figure out a nice gift for your son or daughter’s wedding? Instead of an extravagant wedding day, or the traditional stuff, put $10,000 into the newlyweds investment vehicle, and educate them on Warren Buffett’s secret…

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