Just give me enough time
CWP Monday Morning Digest May 21st, 2018 | Volume 21
Just Give Me Enough Time...
Albert Einstein is famous for many quotes, and he often gets credit for some great stuff that he didn't even say. But my favorite, actual Einstein quote revolves around compound interest being the 8th wonder of the world.
"...he who understands it, earns it. He who doesn't, pays it." ~Albert Einstein
The power of compound interest is astounding but is something that takes a long time to show us that it's working. In my humble opinion, one of the biggest mental barriers keeping people from saving more money for retirement is that our account balance is just so darned small when we first start saving.
The biggest benefits of compound interest show themselves much later in our lives, but you can't get to that point without having the patience to stick to the plan in the early years.
The most amazing thing about compound interest is what it can do for very small, incremental changes at the end of a very large number of years. Ben Carlson from A Wealth of Common Sense joins us in slot #1 this week showing us the power that those very small incremental changes can have on retirement savings.
Ben looks at what modest increases in our savings rate, our rate of return, and increases in our income can have over different time frames. What difference would a half percent make for you?
"Let’s assume we have a couple with a household income of $75,000 who have 30 years to save for retirement. Each year we’ll increase their income by 2% to account for raises and inflation. They decide to save 10% of their income each year.
We’ll also assume they earn a more modest return than what Mr. Merriman uses in his example and make 6% a year on their investments. Over a 30 year period, this household would end up with $781k and change. Not bad.
But changing those assumptions by just a half percent can make things even better. Let’s assume they increased their savings rate by a half percent from 10% to 10.5%. That gives an ending balance of $820k. Better." ~ Ben Carlson
That extra $40,000 at the end of the 30 years comes from a mere $375 per year in additional savings. If they're adding that to a 401k, they likely wouldn't even notice the difference in their paychecks, especially accounting for the benefits of tax savings on the contributions.
If you want more money for your retirement or simply in your savings accounts in general, you have only three logical solutions:
1. Make more money (so you can save more) 2. Increase the return you get on your investments 3. Increase your savings rate
The third is the one you have the most control over, and you can start tomorrow if you want to.
I'll Show You My Retirement Account if You Show Me Yours
We jump to a story in slot #2 that created a bit of controversy amongst younger and older folks alike by Ali Malito at MarketWatch.
Her inspiration was a study produced by Fidelity on financial fitness and benchmark amounts of money you should have saved at different points in your life. Ali utilized a study looking at different decades and age milestones and the verdict was...you should have twice your salary saved in a retirement account by the time you're 35, three times when you're 40, and six times your salary when you're 50. This apparently caused a pretty viral meltdown on Twitter.
What that means in dollar terms is that if you're 50 years old and make $75,000 per year, you should have $450,000 in savings. If you're 35 and make $50,000 a year, you should have $100,000 in savings.
Fidelity claims that you need to start saving 15% of your income when you're 25 to hit these marks.
Here's a link to the actual study by Fidelity if you'd like more info on the data behind this.
My take on this whole thing? Data points that tell us that we should be anything that looks uniform or that compare us to others is silly at best and most likely dangerous in that it generally has the exact opposite effect that the data hopes to create: people tend to just stop trying.
Retirement savings are personal to you, just like your personal health. Sure, there are always going to be benchmarks that we can use to check our progress and overall well being, but anything that causes people to give up on being "healthy", either with their body or their finances, is a bad idea.
Just start saving. Start today and start with a small amount. Getting the account opened might be the hardest part, and then you can put it on autopilot.
If you don't have 2x your salary when you're 35, or 3x your salary when you're 40, you ARE NOT failing - but you need to get started with a savings plan. You should be thinking about ways that you can get yourself organized and try and increase your savings rate by a half a percent sooner rather than later.
Go be great this week, and do something kind for someone who needs it.
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