Oct 28, 2014

Weekday Wisdom from the Ec Expert: Retirement Investments For Dummies!


I'm interested in a lot of things - writing, acting, blogging, social media, biology, research, travel, politics, international relations, business, fashion, etc.

Finance isn't one of them.

Unfortunately for me, and everyone else who isn't a finance whiz, it's very important to make smart financial decisions. Making smart financial decisions can mean the difference between a golden age retirement, full of travel and gardening, and not being able to retire at all. Yikes!


Don't let that be you.

Retirement seems far away, especially for those of us who are fresh out of college, but now is the time to start saving for retirement.

Don't believe me? Read on for a straight-forward explanation of why you should worry about your retirement funds now!

***

Imagine two people trying to save for retirement. 

Alice invests $5,000 each year from ages 20 to 29 and then proceeds to not contribute a cent more (not what I would recommend). 


Bob socks away $5,000 every year starting at age 30 but keeps contributing right up until retirement. 

Who has more money in the bank when both retire at age 65, assuming a (reasonable) 7% rate of return? No peeking!

Believe it or not (and I know a lot of people who didn’t until I showed them), Alice is ahead of Bob for retirement!

For everyone who isn't Ben and doesn't love Excel - just focus on the highlighted fields. Alice ends up with more!
Alice contributed only $50,000, but ends up with almost $800,000. Bob contributed $180,000, but retired with a little under $750,000. What happened here?

The key effect here was compounding interest. 

By the time Bob started contributing to his retirement account, Alice’s nest egg was already earning thousands of dollars per year in investment returns. Even though he contributed over three times as much in total, he couldn’t catch up to her early start. 


Making Money Online

(Bob’s contributions might weigh more, but his nest egg doesn’t).

In this case, the tortoise and the hare isn’t quite right. 

Alice’s hare fell asleep on the track at age 30 and still won the race! Slow and steady is fine, but it works best if you start early. Every bit counts, and the earlier bits count the most. In fact, by the time Alice retires, the $5,000 she saved at age 20 is now worth over $100,000! 

The $5,000 Bob saved at age 65 is worth, well, $5,000. I bet he wished now that he’d picked her plan!

So get saving, and get your money working for you! It may seem silly to be worried about retirement at age 20, but whatever age you’re at is a great time to start if you want to avoid worries further down the road. 

Your future self will thank you, and be happy that you were so clever when you were younger.  

And, just for those who’d like to see the answer to my question, here are the trajectories of our two guinea pigs’ nest eggs:



In my next columns I’ll cover useful tools for budgeting and how to invest your retirement savings for the long haul (the only way to do it!). 

***

Ben Cohen was born in Washington, D.C. and majored in economics at Harvard University. He now works full-time in risk analysis and does academic research on the side. He loves science fiction, sushi, and efficient long-term investing. 

How are you preparing for your retirement?

What finance strategy do you not understand? 

{ 0 } comments... read them below or add one

Post a Comment

Please say hello, leave your comments, or answer my questions! It makes me smile when you leave me a note :) I read every single one of them and it makes my day when you guys say hi!

© Living, Learning, Eating, AllRightsReserved.

Designed by Danai