There’s a very popular concept in personal finance (sometimes called “Bob vs Adam”) that goes along the following lines:
Bob starts investing at the age of 20 and puts away $10k a year.
By the time Bob turns 30, he has squirreled away $100k. Deciding that’s enough, he goes full stop.
Plain and simple – no more contributions for the rest of Bob’s life.
Adam, on the other hand, doesn’t start until 30. He then starts chucking in the same $10k a year for the next thirty years.
All in, Adam puts away $300k over his investing “career”.
Now, if you’ve been reading this blog for a while, you know how the story goes:
At the age of 60, Bob ends up with about $1.6m.
Far, far ahead of Adam, who only accumulates about $1.2m – despite contributing three times as much as Bob.
It’s a story that’s appealing and scary at the same time.
And too bad for those who didn’t.
Except that’s just the very beginning.
Life After Death Thirty
It might not seem like that when you are 20, or even 25, but life doesn’t end once you get past the 30 mark.
So let’s extend the analogy above to Emily and Jake.
They are both late to the investing party. Emily starts at 40, and Jake starts at 50.
Both of them contribute the same $10k a year as Bob and Adam. This is what the result looks like:
That’s right. They end up with just $500k and $166k respectively.
Now, it’s easy to gasp and say “jeez, Jake’s $166k portfolio sure looks sad in comparison”.
Well, no shit surprise there, Sherlock. After all, he only contributed $100k.
What’s far more striking here is the relative underperformance.
Adam is late to the party by 10 years – and his portfolio ends up 22% smaller than Bob’s.
Emily is also late by just 10 years (compared to Adam). And yet, her portfolio comes in a whopping 59% below Adam’s.
And yes, Jake ends up with the really short end of the stick.
67% below Emily and orders of magnitude behind Bob and Adam.
Now, short of inventing a time machine, there are actually quite a few things Emily and Jake can do to correct the situation.
They could increase their savings rate. Alternatively, they could increase their earnings (which should be very achievable given they are likely in their prime earning years).
Possibly even do both of the above, giving their portfolios a powerful boost.
But the most important thing they can do by a stretch is to simply get off their backsides.
Starting to invest is hard – especially if you are in your 40s or 50s and haven’t really paid attention to your finances before.
You are not exactly going to download a Robinhood account and start trading crypto in 5 minutes like all the millennials out there (and neither should you).
And so, it’s easy to punt things by a month, then another month.
All of a sudden, another year goes by, and you are still just treading water.
But the bottom line is that it doesn’t really matter how old you are today and the fact that you didn’t get started earlier.
What matters is one fact, and one fact only:
If you wait any longer, the contributions required to achieve the same financial goal will rise exponentially.
The table below shows the monthly payment you need to make to end up with a $1m net worth by the age of 60:
If you are 20, it only takes about $300/month to get there – courtesy of a long-run return of 8%.
Punt it until you are 40, and it becomes a real whopper of almost $1,700/month.
But twiddle your thumbs for just 5 years more – and you are looking at $2,800/month.
Make no mistake, if you are 30+ years old and you still haven’t started investing, you are now in a state of emergency.
And there’s zero time to twiddle thumbs when you find yourself in an emergency.
But now for the good news…
You will notice that the rates of return in the table above start at 8% – and go all the way to 14%.
Now, I’m not deluded. There’s no way we are going to see 14% annualized stock market returns going forward.
However, you are still able to get a return of between 12% and 15% in the stock market.
How? By using vehicles like your workplace pension here in the UK, or the 401(k) in the US.
Assuming a 20% tax rate at withdrawal, your UK workplace pension plan should be able to achieve a 12% return at a minimum.
It’s a little harder to quantify the uptick you would get from a 401(k) plan given the variety of matching and vesting options out there, as well as the variability in returns (another reason for Brits to be grateful for how good we have it over here).
However, you can still rely on the matching and tax breaks to give your returns a veritable boost.
Have another look at the table below to see just how much of a difference it makes to be able to go from 8% to 12% or even 14%:
And now: count your blessings, get off your backside, and start putting money to work.
It will be too late tomorrow.