Albert Einstein once said, “Compound interest is the eighth wonder of the world.” It really is, but most people never stop to think about it – especially young people.
We had an awesome Does it Pencil Webinar on Friday – thanks to everyone who showed up. One of the things we talked about was the math of retirement planning. This topic came up when we were talking about some basic stock market investing stuff. That conversation rolled to the 20-something children of the mothers on the call, and then to their retirement. As we went through the discussion, I knew in a general way about the role compound interest plays over time, but I didn’t have a tool handy to show it to the group at the time. So I made one.
Quick Example
The link below will take you to a hidden webpage on the Does it Pencil website where you can download a one-page Excel sheet I’ve created. In 2 seconds it will tell you how much you’ll have in retirement. There’s also a short video on how to use it. But for now, let me share a quick example to illustrate the drastic difference between starting sooner than later to save for retirement, and then you can go fiddle with your future.
In the worksheet you only have to fill in two blanks: your monthly payment and your rate of return. Everything else auto-calculates and it’s locked so you can’t corrupt it. In the example in the video I used just a $100 a month contribution. I also used a 12.4% rate of return because that’s the average annual rate of return of the S & P 500 Index since 2008. That seems like a pretty good broad base indicator, your mileage may vary.
With those to parameters set, if you start at age 25 and go until age 65, you will contribute a total of $48,000, and at age 65 you will have $1,335,584.
But…
If you start at age 35 and go until age 65, you will contribute a total of $36,000, and at age 65 you will have $382,105.
What that means by contributing the same amount but starting just 10 years earlier and adding $12,000 more, you will have $953,479 more at age 65.
So there ya go. Download the sheet, watch the video, and then fiddle with it. When you do, one of three things will probably happen: you’ll be super happy, you’ll be whatevs, or you’ll be freaking out.
The Math, the Truth, the Talk
I showed my new toy to a friend who is now 75. We had a pretty good chat about inflation, hair loss, and the ‘70’s. He reminded me that young men at age 25 are looking for other things than planning for retirement. Having once had the hair and hormones of a 25-year-old, I knew exactly what he meant. But the worksheet makes a simple point that doesn’t lie: start as soon as you can. Don’t worry about inflation or taxes, just start. And if you’re one of those people who is allergic to money and can’t keep it around, devise some kind of automatic withdrawal plan so you can’t touch it. Future you will appreciate that.
The worksheet provides four start ages: 25, 35, 45, and 55. If you have a kid in their 20’s, have the talk. If you have a grandchild in their late teens, have the talk. And if you have a spouse and the two of you have never had the talk, have the talk.
Pro Tips for Late Bloomers
Finally, if you find yourself over the age of 55 and still getting ready to get started with retirement savings, here are a couple of pro tips that can help: if you’re in a job you wish you never had, and working for a boss you wish you’d never met, think about switching now because if you’re over 55 and have nothing saved for retirement, you’ll probably be working past age 65. If that doesn’t work, remember the one investment thousands of people make every week to fund their hopes, dreams, and fantasies: Power Ball.
Here’s the link: https://doesitpencil.com/retirement/
Good luck and have a good week.
Joe Still
2024.04.21
Cite
“Youth is wasted on the young.”
-George Bernard Shaw