Dear Member of the Class of 2014:
Congratulations on your achievement! Your degree is a significant accomplishment, and you should be proud of yourself for reaching that milestone. Before you get too far along your life’s path, you should be aware that right now, you have a once-in-a-lifetime opportunity to give yourself a decent chance of winding up a multimillionaire.
Unlike most “limited-time offers” that seem to be repeated frequently, this is one opportunity where time really does matter. It relies on you investing early and often, and then letting the magic of compounding work on your behalf over time. The longer your time frame, the easier it is. And by starting now, you just might be able to become a multimillionaire by retirement, using just the money you can invest in an individual retirement account.
How Does That Work?
The chart below shows what you might end up with at age 67, assuming you invest $5,500 per year in your IRA — the current maximum for people younger than 50 — and average around 8 percent per year in returns. There are four lines on that chart. The first assumes you get started now, at around age 23. The other three assume you take a few years to get yourself established before you start investing for your retirement. The difference in the outcomes is stunning.
Data from author’s calculations.
Start saving and investing at age 23, and you can wind up with over $2.1 million. Wait until age 28 to start, and the number drops to $1.4 million. Starting at 33, your investment total drops below $1 million. And by waiting until age 38, it winds up closer to $600,000. The only difference is the age that you start, which makes starting your investing journey now the best gift you can give yourself.
There are no guarantees in investing, but 8 percent is in line with — or even a bit below — how a broad market index like the S&P 500 (^GPSC) has performed over the long haul when you reinvest dividends. Not only that, but even if the future doesn’t stack up as well as the past, the reality is that lousy investing returns still beat not investing at all.