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Wall Street Steward Blog

The Youth Will Be Served

If someone were to type “youth + investing” into a Google search, it returns over 8 million hits.  Needless to say, trying to read every article on this topic would create “paralysis by analysis.”

Luckily, you are a fan of wallstreetsteward.com, and my goal is to simplify your life.

All you need to know regarding the relationship between age and investing is:

The younger you start investing, the better.

However, I do not expect you to just take my word for it…I plan to prove it to you.
 
Paul the Procrastinator*
Paul waits until he is 40 years old to start funding his retirement account, but puts in $5,000 per year for 25 years (until his retirement age of 65).  Paul is a moderate-aggressive investor and averages an 8% annual return over his 25 years of investing.  Here are the vitals:

Contributions per year:  $5,000
Average Annual Return:  8%
Total contributions$125,000 ($5,000 per year for 25 years)
Retirement nest-egg at age 65$394,772

Eddie the Early Bird*
Eddie decides to sacrifice some of the finer things in life to begin saving for retirement at an early age.  He also contributes $5,000 per year to his retirement account, but he starts at age 20.  Just to make things interesting, let us assume that he contributes for only 5 years and then S T O P S and just lets the account grow.  Eddie is also a moderate-aggressive investor and averages 8% per year.

Contributions per year:  $5,000
Average Annual Return:  8%
Total contributions$25,000 ($5,000 per year for 5 years)
Retirement nest-egg at age 65$688,211

Just to reiterate…Eddie only had to contribute for 5 years, whereas Paul had to contribute for 25 years.  They both averaged 8% annually and they both retired at age 65.  Both of them have nice nest-eggs…but Paul has to live frugally to make sure his lasts his entire retirement.  Eddie, on the other hand, can retire in style

Since I am a weirdo/numbers cruncher, I decided to throw in a kink.  What if Eddie only needed $394,772 to retire (Paul’s nest-egg at 65 years old)?  When would he reach that number and could he retire early?  The answer is YES to both.  He could retire at age 58 with the same amount of money that Paul will have at age 65.  Retire 7 YEARS earlier.  HOW YOU LIKE DEM APPLES?

 
WHO WANTS TO BE A MILLIONAIRE?
Remember when Regis used to ask people “Are you ready to play Who Wants To Be a MILLIONAIRE?!”  If your goal is to become a millionaire and you start at a young age, it is feasible.  You do not have to be a professional athlete or a CEO.   It only costs about $5 per day.

Tiffany started investing upon high school graduation at age 18 and contributed $150 per month ($5 per day).  Let’s assume an 8% annual growth rate – at what age will this young investor cross the million dollar mark?  What is your guess? 

66.  Not 85…no walkers, no dentures (probably), no moth ball odor.

That is the answer:  66.  She has to sacrifice a fast food meal per day, average 8% annually, and at age 66, she will retire a millionaire.*

We can slice and dice the numbers in multiple ways:  add/subtract years, use 10% annually instead of 8%, add money more or less frequently, etc.  We can change any of the variables, but the bottom line is:  The earlier an investor starts, the better off.  Period.  End of story. 

No, I mean literally…end of story.

Creative Commons License photo credit: Photography By Spree2010

*The examples provided in this article are hypothetical and do not represent any specific situation. The hypothetical rates of return used do not reflect the deduction of the fees and charges inherent to investing. Your results will vary.