It Will Be Too Late Tomorrow

It will be too late tomorrow

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:

Bob vs Adam

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.

All hail folks like Bob, who saw the proverbial light early on – and took advantage of the magic money machine.

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.

Sure, the compounding graphs don’t look as pretty anymore, but there are plenty of ways to build wealth in your 40s – and (gasp!) even in your 50s.

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:

Emily vs Jake

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.

Net Worth At 60

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.

Mitigating Factors

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:

Monthly contributions required

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…

Booster Shot

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.

UK workplace pension returns

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%:

Monthly contributions required

And now: count your blessings, get off your backside, and start putting money to work.

It will be too late tomorrow.

Happy investing!

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Banker On FIRE is an M&A (mergers and acquisitions) investment banker. I am passionate about capital markets, behavioural economics, financial independence, and living the best life possible.

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23 thoughts on “It Will Be Too Late Tomorrow”

  1. I can attest you can start at thirty and do fine. I did not have access to a 401K until I was thirty and still achieved well over a million by the time I was 55 years old. I also had over a million in taxable accounts by then. I am confused by your saying a UK pension can generate 12% or more returns. How is that possible when no stock market averages those kind of returns? I’m not arguing, I’m sure you are correct, I’m just not sure how that works. Great post.

    1. Hi Stevark

      I assume this includes the employer contributions

      I pay 8% of my salary into my pension and my company matches that, so the investment yield is doubled. That’s before the tax relief

      Another good article BoF, I started very late (49, albeit always been in company pensions schemes) but even if I only work for 9 more years, that is 9 years more
      Investing than I was doing before that.

      Not sure who said “the 2 best times to plant a tree are 20 years ago, and now” but investing is the same.

      1. I absolutely get the effects of compounding, and I think the message has to be to do what you can as early as you can.

        Money is worth different amounts to you at different times in your life but there are certain fundamental principles such as not passing up the employer match that should always be taken advantage of. Other than that I think if you always look to grow your income, keep a lid on your lifestyle inflation and therefore limit expenses and then invest as much as you can, you won’t go far wrong.

        I suppose one advantage of starting later in life is that you can absolutely focus on pension contributions if in the uk. They’re are almost always the most tax efficient way of saving for retirement as you have demonstrated previously so if you are unlikely to need to bridge the gap to pension access then you can really go all in on maximising contributions.

        1. Banker On FIRE

          To me, that’s one of the biggest tools at your disposal if you are starting late.

          At the age of 45 or 50, you aren’t really locking your money away for that long – and in return, you get a tremendous boost on your savings.

          Now that our pensions are pretty well funded (possibly slightly overfunded), we are in the “bridging the gap” territory. Not getting those employer match sure makes a difference!

        1. Banker On FIRE

          Steveark, the UK workplace pension has got to be one of the most generous savings / investment vehicles I’ve ever come across.

          There’s the employer match, the tax break, as well as possibly a break on NI (i.e. employment insurance) contributions.

          On top of that, it’s mandatory, there are no vesting periods, and 25% of the money is tax-free at withdrawal.

          Add all of those up and the returns get into 12% – 15% territory pretty quickly, especially for those in a higher tax bracket.

          By the way, like you, I also started at pretty much zero when I was 30 and you are absolutely correct in saying there’s plenty of runway from there.

          I do wish I had gotten started earlier – I was always good at saving money but not so good at putting them to work.

          1. True – but there are limits to the apparent largesse and the whole area seems to be in a constant state of flux these days.
            Also – on the way out (with the possible exception of RMD’s) the US tax system is far more generous to pensioners than the UK, especially around SS which itself is far more generous than the UK state pension too

      2. Banker On FIRE

        Spot on PortlyGent, on both counts.

        49 may be too late for someone who is 30 or 40, but ask a 60 or a 70-year-old if they could go back to being 49 and I can pretty much guarantee what the answer will be 🙂

        Also, it’s not like you are going to cash your investments out the day you retire. Chances are, a meaningful chunk stays invested over the next 20-30 years.

  2. Yeah, I wish that I had more wisely invested when I was in my 20s. Then I perhaps would be really staring FAT Fire in the face instead of trying to decide if I can actually retire or not retire, or be in various states of limbo. Most folks probably count on investing once they are earning the big bucks, but then can’t reel in their lifestyle inflation.

    Anyways, if you are in your 20s, max out your 401K even if it seems asinine. Put as much in now and you can Coast into retirement later!

    1. Banker On FIRE

      Well, the good news is you are still pretty young!

      I think it’s a bit like working out. Even if you don’t have time to hit the gym properly, being active for 15 minutes a day will at least set the right habits in place for when you do have more time.

      So early on, it’s more about building the habit of living below your means and saving/investing the difference, even if the amounts involved are tiny.

      The habit you are building is much more important than the money you are putting away.

  3. Agreed. The workplace pension is a great vehicle for most tax rate payers.

    I use it to get out of the dreaded 62% tax band. Even if I end up breaching the lifetime allowance – and likely will based on current modelling, I’ll still be up. Current employer also allows employer contributions as cash subject to employer NI and personal IT and NI of course.

    My wife for an 8% contribution gets 12% from employer, gets 12% Employee NI saved as it’s through salary sacrifice and all of the employer NI added (as a basic rate tax payer). Putting some numbers to it, a £68 cash in pocket cost -> £100 personal contribution + £150 employee contribution + £13.80 ER NI saved. £68 has become £263.80 gross. Obviously this likely will get taxed at 15% (20% less 25% tax free, assuming this stays the same) but it’s a great deal all round.

    1. Banker On FIRE

      I think that’s right.

      Given time value of money, you will likely end up ahead even if your tax bill at withdrawal (in absolute terms) is higher than the tax bill today, especially if we are talking about a time horizon of 10+ years.

      A dollar/pound today always worth more than a dollar tomorrow.

      My only hope is they don’t continue reducing the pension tax benefits, either explicitly (taper) or implicitly (not indexing the LTA).

  4. BuildBackBetter

    The only problem with starting at 20, for this generation, is – we need to prioritise buying a home. Unless you count the down payment on a home as an investment!
    We managed to maximise savings and borrowed more to pay for a house deposit. Left with nothing now except the house and start from scratch at 35!

    1. Banker On FIRE

      I know some people are in the “renting is better than owning” camp but I am a firm believer in owning your own house.

      Even though we rent our primary residence, we’ve got considerable real estate holdings elsewhere.

      With deleveraging and some conservative price appreciation, you can almost replicate private equity-like returns of 15%+, as long as you hold for a reasonable period of time:

      In other words, you are in a good place!

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  6. Posts like these make me regret not investing when I was like 16 and working at Sears, haha. I wish I read personal finance blogs in high school, maybe I wouldn’t have done day trading like how I did so much when I was in college. Live and learn!

      1. I wish schools did a better job of teaching youth about investing options. I was always a saver when I could but my $50 a month would have much better off in an investing account instead of my simple local savings account making hardly any interest to speak of. One thing I wish I could have told myself the day I was eligible was to open an Roth IRA or any brokerage account and start saving.
        But from attempting to explain this to my younger brother, I can see how hard it would have been for me to see the bigger picture.

        1. Banker On FIRE

          It’s a tough one, isn’t it?

          My parents were excellent at teaching me to save money, but not so much about investing.

          As a result, I’ve forgone many pleasures in my teens (including buying my dream car) but because the money was stuck in a savings account, I never realized the benefit from all that forgone consumption!

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  8. I didn’t start investing hardcore till my thirties….I try not to think about the “magical lost years” of my early 20’s when compound interest could really have made a difference. I did have a few investments in my 20’s but the Great Recession hit me hard and I sold what I had to make ends meet.

    The difficulty at starting investing at 20 is that retirement (even your 30’s) feels so far off and unreal that we feel we can worry about it later. I think human optimism sort of fuels this myth that we can easily catch back up. I do wish public schools could cover compound interest and investing basics.

    1. Banker On FIRE

      Same here. I’ve done very little meaningful investing in my 20s.

      No time machines here, the best we can do is put the pedal to the metal now and make the best of time we have left!

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