Time is our most precious asset. Every minute gone is a minute you can’t get back. And while that may sound kind of depressing, you can use it to your advantage in the world of investing.
Being an old man myself, I was recently making a visit to an oral surgeon. The surgeon asked me what I do, and I told him I’m a portfolio manager. So he turned to one of his young assistants, who was 19 years old, and started talking to them about investing. Then he asked me, “What’s the most important advice you can give to a young person?”
I didn’t hesitate to answer: “Start now.”
Here’s why.
IRAs were first introduced in 1975. In the early 1980s, Primerica published a simple math problem. Suppose someone opened an IRA as soon as it was legally allowed at age 18, and contributed the maximum amount allowed (currently $7,500) every year until they turned 27, and then did not make any more contributions. We’ll call her person A.
Now suppose person B waited to open an IRA until he was 27, and then contributed the maximum amount every year until age 67. (Although the original study went to age 65, I’ve moved it to age 67, which is the current official full retirement age for Social Security purposes.)
The results are startling. But first let’s make some assumptions.
Assumption number one: We will assume the annual rate of return will be a steady 7 percent per year. The real world is substantially messier, but if we get lost in trying to figure out the impact of varying rates of return, we’ll miss the most important point—the value of time. For that reason, I’m keeping it at a steady rate of return.
Assumption number 2: The maximum IRA contribution will remain at $7,500 per year. Over a 50-year period, it’s unlikely to stay the same, but we can’t forecast how or even if that might change, so we’ll stick with $7,500 per year.
Now to the big conclusion—and it’s dramatic.
Person A, the 18-year-old who puts $7,500 per year into her IRA until she’s 27—that’s 10 years total and $75,000 invested—ends up at age 67 with $1,551,704, due to how the money gets compounded.
When I relayed this story to the 19-year-old dental assistant, she asked, “What? How is that possible?”
Here’s how:
Year one, person A deposits $7,500. At the end of that year, the money has earned 7 percent, so it’s now $8,025. At that point, she adds another $7,500, and at the end of year two, the $15,000 is worth $16,612. She’s already made an extra $1,612. Just like making a snowman by starting with a snowball and rolling it around in the snow to make it really big, modest sums of money invested over time have the chance to turn into substantial sums. It’s money making money.
So even though our 18-year-old person A stops making contributions when she turns 27, her now sizeable account keeps growing every year, at least in our hypothetical case.
But what about person B? He isn’t able to make investments until a little later. He starts at age 27 and faithfully invests an additional $7,500 every year for the next 40 years. He does come out better, but not by much. At age 67 he’ll have $1,602,072.
Believe it: Time is your most important asset.
My late mother-in-law, sometime in her 90s, said, “I don’t have any problem with wasting time, I just don’t have any to waste.”
You don’t either.
Hal Masover is a Chartered Retirement Planning Counselor and a registered representative. His firm, Investment Insights, LLC is at 508 N 2nd Street, Suite 203, Fairfield, IA 52556. Securities offered through, Cambridge Investment Research, Inc, a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Investment Insights, Inc & Cambridge are not affiliated. Comments and questions can be sent to hal@getyourinsight.com. These are the opinions of Hal Masover and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal. Past performance is no guarantee of future results.