Unfortunately, one place young people tend to be too cautious is in the area of investing. They are at a time in their lives when they could take a nasty investment “fall,” dust themselves off, and get back on track financially very easily, but instead of taking the risk they put off investing until a later time. In fact, it is often older people a few years out from retirement that are taking way to much risk by being fully invested in stocks or heavily leveraged on their home because they are trying to make up for lost time. Many people saw their retirement plans delayed after the 2008 stock market crash because they were totally invested in stocks and saw their retirement accounts cut by 40%.
The main reasons young people site for not investing is that they don’t have the time and they don’t have the knowledge needed. To those who have this view, let me ask you this: How much effort would you put into a task that would pay you $8 million? Would you devote 100 hours per week for a few months or even a couple of years? Would you put aside other things in your life and do what was needed? I’ll bet you would. Most people would work 100 hour weeks for five years to get $1 million. Imagine getting eight!
Take a look at the table below. This shows the account value you would have at age 70 if you started investing $5,000 per year at ages 20 through 45, assuming the historic rate of return of the stock market. Note that $5000 per year is 15% of $33,000 – the amount that someone who is making $33,000 per year should be putting away for retirement. It also shows your total contributions – how much money you would have invested. If you started investing at age 20, you would retire at age 70 with $12 M. If you wait until you are 30 before you start investing, you would only retire with $3.8 M – an $8 M difference! By waiting to start investing because you are too busy to spend a half hour going to a website and setting up an IRA account or choosing investment options in your company’s 401k account, you are giving up $8 M at retirement. By texting friends or watching sports on TV instead of reading books on investing and using other resources to learn investing, you are giving up $8 M.
Starting Age Balance at Retirement Total Contributions
20 $12 M $250,000
25 $6.8 M $225,000
30 $3.8 M $200,000
35 $2.2 M $175,000
40 $1.2 M $150,000
45 $0.67 M $125,000
* Assumes $5000 per year contribution, 12% return, Retire at age 70
What if you just invest more later? Can’t you just make up the difference by investing more later? Well, the table below shows where you will be starting from age 30 to age 45 if you invest $10,000 per year instead of $5,000. Even starting at age 30, you would have $4.3 M less investing $10,000 per year than if you invested $5,000 per year starting at age 20. Note also that you would contribute $150,000 more over your lifetime, meaning that you would have $150,000 less for cars, college expenses, or vacations than the guy who started investing at age 20. Heck, the guy who started investing at age 20 could even stop at age 45, have an extra $5,000 per year to spend however he wanted, and only come out $670,000 poorer at retirement. He would only have invested $125,000 and come out $3.5 M ahead of the person who invested $400,000 starting at age 30.
Starting Age Balance at Retirement Total Contributions
30 $7.7 M $400,000
35 $4.3 M $350,000
40 $2.4 M $300,000
45 $1.2 M $250,000
* Assumes $10,000 per year contribution, 12% return, Retire at age 70
And what about not knowing how to invest? The SmallIvy Book of Investing costs only $12.99, and is currently on sale for only $9.99 (shameless plug, but it’s my website). Just by reading chapters 2 and 3, you could learn a great deal about the different types of assets and the risks involved and know a lot more about investing than many financial advisers. Heck, just skip to Chapter 9 and read about mutual fund investing and you’ll be in good shape. Is spending $9.99 too much to learn the information you need to make an extra $8 M? You can get the electronic version for only $3.99!
Beyond my book, there are tons of other great books on investing. Just go to Amazon or your local bookstore and head to the investing section. Just find a book that gives the basics, particularly on mutual fund investing. Get a few and spend a weekend learning. You can also find great online resources such as the Bogleheads site and past issues of this blog.
Enough excuses. Get in there and start investing today. Every day you wait will mean less money when you are ready to retire. Take a chance and start investing.
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.
