Every year we have the privilege to be a participant in the Central Florida surveyors vendors’ night. We do retirement planning for a few of the surveying firms in the Orlando area so we like to support them. I was walking around the convention marveling at all the gadgets (typically I have no idea what I’m looking at). I was watching a demo and they were showing some new equipment that allowed surveyors to drive by in a truck and get all the potential data. This allowed the surveying crew to do the job faster and in a safer manner since they weren’t exposed to the traffic while standing on the side of the road. The demonstrator was showing how to manipulate the data and show all the measurements. After about 5 minutes of watching this, one of the sales guys came up to me and asked, “Do you do a lot of surveying?” I paused for a second and said, “No, not at all”. I then told him what I did, that I do retirement planning. He responded with a comical statement, “Well, if I sell enough of these I’ll give you a call”. We both laughed and I went back to watching the demo.
I was thinking about that statement on the way home, “If I sell enough of these I will give you a call.” Now, I realize this was a joke from the guy, but too many people feel that way about retirement planning. I’ve heard, “when I can save $100 a month I’ll start saving, I can only afford to save $50 right now and that won’t really make a big difference, right?” Actually, the little amounts add up more than most people think. The small amounts and the earlier you start have a bigger impact than most people can ever imagine. Let’s look at some math…
We have two people who want to have 1 million dollars at age 65. If they both earn 9% how much will each of them have to save each month if one is 25 and the other is 45?
Well, obviously the 45 year old will have to save more because he doesn’t have as much time to benefit from growth and is approaching age 65 much sooner than the 25 year old. You would think since the 45 year only has 20 years (instead of 40 years like the 25 year old) he would have to save twice or maybe three times the amount of his younger counterpart. Would you believe that the 45 year out would have to save 7 times the amount of the 25 year old to reach the same goal? Its true and the 45 year old actually has to save over 700% more per month than the 25 year old to reach the million dollar mark at age 65. The 25 year old will have 1 million dollars in this example at age 65 by putting away $213.61 per month. The 45 year old will have to put away $1,497.26 per month to reach the same goal of 1 million dollars.
Obviously, we all have different goals and saving habits, but it is true the earlier and sooner you can start the better. Even if it is just a “small” amount those little amounts can add up to more than you can ever imagine over five, ten, or even twenty year periods. Do not wait for major life events to start your savings plan. You shouldn’t have to complete a checklist of accomplishments before you start saving for retirement. It should be something that is started as soon as possible. As you can see by this example, the earlier you start the less money you actually have to take away from your budget. The 25 year old missed out on buying $102,532 worth of stuff before retirement but had 1 million dollars at retirement. To put it another way, he put in $102,532 and earned $897,468 in profits. The 45 year old missed out on buying $359,280 worth of items and landed at retirement with $1,000,000. He put in $359,280 and made $640,720 worth of profits. The 25 year old was able to spend $256,748 more during his career because he started early and had the same goal as the 45 year old.
It’s easy to be the guy who says, “I’ll give you a call if I sell enough of these” because human nature is to think things are going to get easier and better. What if the time never comes when you can save your ideal amount per month? Get started now with any amount you can. This will reap long term benefits with greater rewards than you ever thought possible.
If you have any questions about investing or retirement planning please feel free to reach out to us.