In episode 333 of the Pete the Planner Show, Pete and I found ourselves discussing the role that time plays in our investing lives. The short version is this: The younger you are when you begin investing, the more of an advantage time offers you. For example, let’s say that you’re fresh out of college (22 years old) and start saving diligently in your company sponsored retirement plan. Nice job. By the time retirement rolls around, you’re going to be way ahead (financially) of your cubicle-mate who waited until they were 32 years old to get serious about preparing for their future.
Does that mean that time is no longer an advantage for the 32 year old? Of course not! The 32 year old can’t leverage those previous 10 years they lost (unless they postpone retiring by 10 additional years, and let me tell you, that would change the landscape of this example dramatically), but they still have time available to them.
Time, in both life and investing, is an incredibly valuable resource. Just because you may have less of it doesn’t mean it’s still not valuable, however. Any chance you have to harness the power of time, regardless of how small, can be a huge benefit to you. Let’s look at the following examples to illustrate the concept.
We’ll look at four different workers aged 22, 32, 42, and 52. All of them will make $50,000 per year, save 12% of their income into a traditional 401(k) plan with their employer, receive a 4% match from their employer, and will retire at age 67. For the purposes of this illustration, each worker will make $50,000 each year for their entire careers and the contributions and matches will stay the same. Additionally, they’ll each earn an 8% return on their investments each and every year. The only variable between all four of the employees is their age and how long they have to invest. What do the results look like?
Age 22
Years to contribute: 45
Total earned income contributed: $270,000
Total employer match contributed: $90,000
Projected account value at retirement: $3,516,377
Age 32
Years to contribute: 35
Total earned income contributed: $210,000
Total employer match contributed: $70,000
Projected account value at retirement: $1,529,262
Age 42
Years to contribute: 25
Total earned income contributed: $150,000
Total employer match contributed: $50,000
Projected account value at retirement: $634,020
Age 52
Years to contribute: 15
Total earned income contributed: $90,000
Total employer match contributed: $30,000
Projected account value at retirement: $230,693
Depending on your age, you could be looking at these results with very wide eyes, albeit for very different reasons. If this is the first time you’ve seen an illustration like this, take a second to soak it in and understand what it’s saying. It may not be what you think it is.
Time benefits each employee. “Sure,” you think. “Look at the results for the 22 year old. That’s crazy!” I agree, and I wish I had been smart enough when I was 22 to follow my own advice.
But, that’s not the age I want to highlight here. Look at the 52 year old. This employee gets a late start preparing for retirement, but they still nearly double their money invested by the time they retire. That’s a huge advantage! If you’re staring down your 50’s, or already find yourself there, don’t throw your hands up in frustration. You can still make good progress on building some assets for retirement by taking advantage of the time available to you.
Regardless of your age, you have a precious resource available to you. Make sure you’re getting the most you can from the time available.
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