Procrastination is the enemy of progress. This is especially true when it comes to your financial health and saving for retirement. Investing today, as soon as you think about it, could be the best decision you ever make for your future.
Why is Investing Today Important?
As we like to say here at Peak: “Your future doesn’t depend on timing the market. It depends on your time in the market.” When you invest immediately and continuously through systematic contributions you are able to take full advantage of the market and reap the rewards of all of the growth. However, if you try to time the market, then not only can you have the opportunity cost of missed time in the market and missed earnings, but you need to be right twice. What I mean by needing to be right twice is the only way to successfully time the market is to perfectly time the market peak when you pull money out, and then also perfectly time the market trough when you put the money back in. Below I will give an example of how drastically different your future can be by simply choosing to invest today rather than waiting for the “perfect time.”
Example of Why you Should Invest Today
Sally and Jimmy are both 25 years old with 40 years until they retire. Sally believes she needs to put money into a retirement account immediately to make sure she will be financially secure. Jimmy on the other hand believes the economy will be poor over the next decade, plus he wants all of the cool new material items he has access to, so he is going to wait until he is 35 to begin saving for retirement.
Sally begins saving $1,000 per month towards her retirement. She earns an average return of 7.2% in the market, which historically is a below average long term return. By the time she reaches age 35 she has $175,003 saved. At this point she has achieved her dream of starting a family and realizes she simply can’t afford to save anymore. As a result, she halts all contributions for the rest of her life. The $175,003 continues to remain invested and earns an average return of 7.2%. By the time Sally is ready to retire at age 65 she now has $1,408,928 saved and she feels comfortable with her financial situation.
Jimmy of course has $0 saved when he reaches age 35, but now he is ready to begin saving for retirement. He sees how well Sally has done and decides to save the exact same $1,000 per month she has been doing, and he will continue this contribution every month until retirement. Of course, since they are in the same time frame he will earn the exact same 7.2% on his investments Sally did. When Jimmy turns 65 he sees his investments have grown to be worth $1,269,225.
The takeaway from this of course is Sally’s account is worth almost $150k more than Jimmy’s despite the fact she only invested for 10 years versus his 30 year contribution time frame. To expand on this point, Sally’s total lifetime contributions were $120,000 whereas Jimmy contributed $360,000 over his lifetime. Sally contributed only ⅓ of what Jimmy did, and she didn’t contribute at all for the final 30 years of her working career, yet she has a larger portfolio than Jimmy. This is possible because Sally had more time in the market since she started so young. Jimmy on the other hand tried to time the market and it cost him dearly in the long run.
Ignoring your desire to continue procrastinating your savings will be detrimental to achieving your long term goals. Starting your savings immediately will help you get a massive head start towards your goals, and can even provide you with flexibility later in life in regards to how much you need to save to achieve those goals. If you would like to speak with an advisor on how to begin saving so you can reach your financial goals, please call us at (734) 681-7575 or email me at email@example.com.
Historical returns are not a prediction of future outcomes, and 7.2% is not a guaranteed rate of return moving forward. This is not a recommendation and is provided for educational purposes only.