When should you start investing for retirement?

As an avid IRA investor, I was asked this question recently for an article pitch. What’s the value of investing early? Let’s try to quantify that in three scenarios.

A: You are a young professional beginning your career at 22. You start investing $10k/year immediately and continue for 20 years until you turn 42. Your kids are in private school, you give up on investing and spend the money on your kids. 20 years later, you begin pulling from these IRA investments at 62.

B: You are a 42 year old professional, you began your career at 22. your kids are school age. You want to get serious about investing because you’re serious and finally settled. You start investing $10k/year immediately and continue for 20 years until you turn 62. You begin pulling from these IRA investments at 62.

Assumptions: 8% yearly return (avg.).

How did they do?

A: $2,303,581.19 (WINNER!)

B: $494,229.21

You may be quick to point out that the above assumption forgets something critical. You will make more money in the future, because you will grow in your career. Fair enough. Let’s run the same calculation with a new assumption in place.

New Assumptions: 3% raise per year (generous, but you are a high performer). Your contribution will grow at the same rate (10,300, 10,600, 10,900, …). The B scenario will begin at the year 20 contribution rate: $17,535.06.

How did they do?

A: $2,874,163.92 (WINNER!)

B: $1,081,293.72

Okay, but $10k/year is tough for someone starting their career. So let’s change the assumption.

Final Assumptions: $5k/year and have the contributions move up at a faster rate: 6% per year. Even though raises are only 3%, you have become more responsible and are better at managing your cost of living (not likely, based on what I have heard from parents). The B scenario will begin at the year 20 contribution rate: $15,128.00.

How did they do?

A: $1,829,574.14 (WINNER!)

B: $1,187,644.37

When should you start investing? Yesterday, based on the data. It’s also good to note that the final contribution in the B case is $45,771.26. I know very few 61 year olds who can manage to contribute that to their retirement in one year (a lean year)

Other Assumptions:

• Buy & Hold, You will never make 8% a year if you ride the emotional market wave.
• No Major Windfalls, Sale of a company, inheritance, insurance settlement.
• Non Failing Investments, At the low point of an investment, even if you hold, companies and projects can still hit the rocks. Have a favorable exit, and diversify.