Financial Opinion and Insights

Waiting to Fund Your 401(k)? Not Good.

Jim Lorenzen, CFP®, AIF®

In fact, that may be the most expensive mistake you’ll ever make!

When I was young, my father told me, “Jim, if you just save 10% of everything you ever make – and start NOW – you’ll never have to worry about money the rest of your life.”   

Parents.  What do they know?

The fact is, the “start NOW” part is the most important part of that sentence!  I didn’t know it, of course; but, saving during those early years truly does make a huge difference!

Here’s a little lesson that will prove just HOW important it is.    I’ll keep the numbers simple for my little hypothetical comparing Fred and Gary.  

Let’s start both of them at age 25; this would give them 40 years before the normal retirement age of 65, though many today are working or even starting businesses past that date.   Also, to keep our hypothetical simple, let’s assume that each saves only $2,000 a year and never increases their savings, and that they earn an average annual return of 8%.

Fred saves $2,000 a year for ten years from age 25 to age 35 and stops saving.  But, he does leave his money in his account to accumulate at 8% until he’s 65.

Gary waits until he’s 35 before starting.  But, Gary invests $2,000 a year, beginning at age 35, for thirty years… all the way to age 65.  Who won?

At age 65, Fred, who invested during only the first ten years, ended up with $291,546.  Gary, who invested for thirty years but started ten years late, ended up with $226,566… almost $65,000 less!    In fact, for Gary to have tied Fred, Gary would have had to invest $2,573 a year – 29% more – each year for all thirty years!

Fred invested for only ten years!  But, it was the FIRST ten!   What if Fred hadn’t quit after ten years?  What if he’d kept going to age 65?  His final number, on only $2,000 a year, would have been $518,113?  That means those first ten years, by not investing, cost Gary $291,547!

Do the math:  Those first ten years, by not investing $2,000 in each year, cost Gary $29,154 per year! 

What if Fred had invested $3,000 each year instead of $2,000?   That would have been an additional $40,000 in savings over that 40-year period; but, given the same returns, the ending dollar figure would be $777,169…. $259,056 more!     And, all of it accomplished on $250 a month!

So, the $40,000 would have purchased a nice car – or, it would have created over a quarter million dollars in additional wealth!   How does that new car look, now?  Pretty expensive, huh?

But, the market is risky, you say?   Good!  You’d better hope it is!  Without risk, you don’t get volatility; and without volatility, investors would have a hard time building wealth.  Volatile markets actually work in favor of the person who’s building; but, that’s another article.

In the meantime, think about what a publisher can accomplish starting early enough!   Then, when sale-day comes, you’ll be adding additional value to a base-line that could be pretty sweet!

Dad was right, as usual.  Tell everyone you know:  Start NOW.


Jim Lorenzen, CFP®, AIF®Jim Lorenzen is a Certified Financial Planner®and An Accredited Investment Fiduciary® in his 20th year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG provides investment and fiduciary consulting to retirement plan sponsors, and retirement and wealth management services for individual investors.  IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.  The Independent Financial Group does not sell financial products or securities and nothing contained herein is an offer or recommendation to purchase any security or the services of any person or organization.  Twitter; @JimLorenzen

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Written by Jim Lorenzen, CFP®, AIF®

May 10, 2012 at 8:00 am