Want to know how $5,500 might turn into $60,000? I’ll explain in a moment.
…But first, if you recall last month’s newsletter describing how a young adult (Millenial) might be working through their challenging financial decision making process, let’s explore why this younger generation also has so much potential to grow their wealth.
…back to the story line….
I did not intentionally try to pick a “get rich quick” scheme headline to grab your attention. It is the simple reality of investing early on in your life and continuing to do so over the long run without paying any attention to fluctuations in the market. Here’s how I derived that number:
$5,500 is the current maximum amount an income earner under the age of 50 can put away into an IRA. If one invests $5,500 into a fully diversified stock portfolio at age 30, received an average annual return of 7% compounded over the next 35 years, their account balance would be $63,283.
While this amount is a hypothetical, non-guaranteed example, one could look at the past returns of the S&P 500 to see what past performance actually was. From 1920 to 2014, the S&P 500 stock market index averaged right around 10% per year. Subtracting out an average annual inflation rate of 3%, an investor would have realized an annual average return of 7%. This is also assuming that all dividends were reinvested back into the investment.*
Now back to the fun part. When somebody (usually a younger person with other visions and ideas for their money) says that they will start saving ‘next year,’ I like to bring up the point that they may be making a $60,000 mistake by procrastinating just one-year. Of course this mistake is exponentially exacerbated by the continual deferring of responsible savings year after year.
Compounding interest over time is one of the most powerful growth effects an investor can enjoy simply by controlling ‘when’ they start to invest. And while this aspect is controllable, investors do not have a lot of control over other aspects of their investment (i.e. returns, political pressures, longevity, health, earnings, etc.).
Another controllable investment factor is your personal savings rate. Everyone has some kind of budget–whether they write it out, mentally account for life’s expenses, or just flat-out spend every last dollar available. However, by making savings a priority (e.g. 10% of your gross annual earnings), you always get paid first!
Pay yourself as if you would be paying rent, a car payment, or a mortgage. If you cannot afford the car, rent, or mortgage because you are paying yourself first, that means you CANNOT afford it. With an approach like this, you can almost ensure that you’ll have enough to comfortably retire on…because you made it a priority!
Too many investors place too much emphasis on getting a magical investment return number. Too many investors have fear of market volatility. And too many investors put too much wishful thinking into investing when they should be putting their money into it instead.
If you’re planning to reap the rewards from investing early and often, we will help you build a diversified portfolio to help get you there. There is no magic investment. There are no guarantees. There’s just you doing the most you can for your family or self by controlling the factors within your control.
Call or email us today to schedule a confidential meeting to evaluate your retiremnet and/or savings plan. Or, forward this to someone who might benefit from it. First half-hour is FREE and there are no obligations. (818) 249-4984
*Sources: MarketWatch.com; Investopedia.com; moneychimp.com;