Investing Advice From My High School SelfSubmitted by Moneywatch Advisors on December 8th, 2020
When I was a freshman in High School I wanted to invest in the stock market. I, of course, had no idea what that really meant or how to do it, but it seemed interesting to me. Now remember, the stock market wasn’t nearly as accessible as it is today. Because of that, my parents equated the stock market to something akin to three-card monte in Times Square, so they told me I could invest when I had saved $1,000 from my paper route. If I had invested my hard-earned $1k into the “stock market” as measured by the S&P 500 then (1979), it would have grown to $93,050 as of the end of 2019. And, get this, if I had added just $500 each year to that initial $1,000 investment, the total would now be $476,597. Holy compound earnings, Batman!
Max Out Your 401(k) or 403(b)
Now I suspect you already understand the principle of compounding and, while the numbers are eye-opening, this really isn’t news. But, let’s take the advice of my 16-year old self and apply the principle of compounding to our retirement planning. The IRS just announced the limits for personal contributions to a 403(b) or 401(k) in 2021 will stay $19,500. If you’re 50 or over, add another $6500.
- If you are 40 and contribute the current maximum contribution of $19,500 until age 65, earning an average annual return on that investment of 7%, your retirement account will total approximately $1.23 Million;
- If you are 50 and do the same thing until age 65? The total will be about $490,000.
- If 50, one would need to contribute almost $49,000 per year in order to reach the same $1.23 Million the 40-year old will attain;
- The best formula: Save, invest, wait, repeat.
A real-life lesson
We often freshen-up client’s financial plans when their circumstances change, or when they are approaching retirement or their financial independence. What that process invariably reveals is how the power of time and compound earnings serves as a very powerful tail-wind, pushing us toward our goals. If one waits to start too close to retirement, however, that tail-wind can only do so much. The example above shows it perfectly – an additional 10 years of saving provides an extra $740,000.
Now, to be clear, it’s never too late to get on the right track. But, if you get a late start, it will take extra effort in the last few years of your earnings career to save what you’ll need to cover your expenses throughout retirement. So, no matter your age or distance to your goal, consider increasing your annual retirement plan contributions in 2021. You’ll be glad you did.