When Does $28,000 equal $148,000?

A Tale of Two Investors

Bob is 21 years old. He starts saving money in what is called a “qualified” retirement investment, (an IRA for example). He puts away $4000 each year, without fail, until he is 28 years old. At that point he stops and never puts another dime in his account. He just lets it sit until he is 65 and plans to retire.

Dave is 21 years old. He is busy with life and things and he doesn’t save any money. Then on his 28th birthday, he realizes that he had better get with it and start saving for retirement. He starts putting $4000 each year into the exact same type of retirement investment that Bob has. He keeps making his deposits every year from age 28 until he retires at age 65.

How will it turn out for these two gentlemen? Bob has put away a total of $28,000. Dave, a total of $148,000. Who will come out on top of the retirement game? Would you be surprised if I told you that Bob would have more money?

Let’s look at what happened.

Just to keep things simple I will use a flat 10% rate of return. Now we all know that life and the world of investing doesn’t work quite like that, but for this exercise it is an easier formula to work with than a more complex algorithm and it will adequately illustrate my point.

That said, we calculate that Bob’s investment of $28,000 could grow to $1,616,310.30 by the time he reaches age 65. Meanwhile Dave’s investment of $148,000 could grow to $1,566,251.85 by the time he retires at age 65. That is a $50,000 difference. That means that in order for Dave to get essentially the same result as Bob, he has to invest $120,000 more than Bob does.

Waiting for 7 years will cost Dave more than $17,000 each of those years.

This simple illustration shows just how powerful an ally time can be when you make it your companion in your personal investment program. It also shows us the high cost of waiting.

Time and Consistency are your friends.

(Disclaimer: This is an illustration for educational purposes only and is not an attempt to project or guarantee any particular investment performance, nor is it intended to advocate any particular type of investment method or product)