Recently I was talking to someone I just met and she was telling me her concerns about getting a late start on her retirement. She was in her mid- forties and she was really starting to panic that she hadn’t really saved enough for retirement. While I agreed with her, that she hadn’t saved enough, I also knew that because she was in her mid-forties, she still had a pretty healthy amount of time to save for retirement. The government is telling people who are age 45 that you have to work until age 70 and they’ve raised the retirement age from age 65. The government’s solution to retirement is having you work longer and retire later. While that is one option, that’s not necessarily the right option for everyone, especially for people who really want to retire sooner.
At age 43, she still has 25 to 30 years to compound, time is on her side, but this is really the time to get after it, because this is where the paths diverge. It’s in your forties, because, as you know, I’ve talked about the Wealth Building Formula (McT), that is money, compounding and time. Those are the three factors that are going to determine how much you have at retirement. It is a combination of how much money you put away, what the rate is you can compound at, and how much time you have to compound. Those are going to affect how much you have at retirement and whether your retirement is comfortable, or if you are just getting by, or even if you have to keep working, because there’s only three factors: money, compounding and time.
Let’s look at each one. Of course you can save more money, and the older you are, the more money you should be putting aside. I talked about that in my Wealth Heiress book, where people got a late start, but made catch-up contributions to their IRA, were able to put more money aside and catch up, because they were also investing well and compounding at a high rate, which really helped them. The C is for compounding. It involves being a good investor (and not having your money sit in a savings account earning 1% interest). If you invested in the stock market, if you are investing in your 401k, if you are using the S & P 500 and using asset allocation with mid-caps (medium companies), small caps (small companies), international, emerging markets, perhaps real estate and some of your favorite sectors, that kind of a portfolio is going to get you to higher compounding rates potentially.
The third factor is time. Certainly the earlier you start saving for retirement, the less stressful it’s going to be on you and the less money you’re going to have to put aside. Let’s look at an example, because I often use the example of investing $5,000 a year at 10% (which is a good average stock market return over the long-term) and a 40 year compounding period. For someone who can compound $5,000 a year for 40 years at 10%, you’ll end up with $2.6 million. That’s right from my Wealth Heiress book, page 48. Now, the reason that that example is so powerful in this particular case is mainly because of the time factor – we’re using 40 years, as a compounding factor. Let’s change that a bit. Let’s take $5,000 contributed to an IRA for 30 years at the same 10% rate. So we are still assuming that you’re investing well, and getting long-term stock market returns, but you started 10 years later and you have 30 years to invest.
Well, $5,000 invested for 30 years at 10% would equal $991,000, so the same amount of money, but starting 10 years later, earning the same return is going to get you under $1 million, instead of $2.6 million. So do you see how the time factor in that example really impacted how much you have at retirement? Let’s look at it this way. Let’s say you doubled your contribution from $5,000 a year to $10,000 a year for 30 years and earn the same 10% return. It wouldn’t grow to $2.6 million even if you doubled your contributions, because your time factor is still 10 years shorter. So instead of $2.6 million, like the first example, if you’ve doubled your contributions from $5,000 to $10,000 a year, compound it for 30 years, at 10% it’s going to equal $1.9 million.
Now remember, you’ve paid in $150,000 more – $5,000 a year, times 30 years, that’s $150,000 extra you’ve paid in and you still have $700,000 less than if you started 10 years earlier. So time is one of the most valuable factors of the three factors (money, compounding and time) in the Wealth Building Formula. That’s why it’s so important for you to get started the earliest you possibly can. If you’re getting started late, make this an absolute priority. Maximize your compounding and what your contributions are that you’re making. Because again, the only three things that are going to affect your retirement are how much money you put away, what rate you’re compounding at, and how much time you have. And if you’re short on time, you’ve got to make up for it by either putting in much more money, or compounding at a higher rate of return, or both.
So as you get to age 40, you’re starting to get to this crucial time period where it makes a big difference to you. Whether you get serious about your retirement or not, it’s easy to put it off and say, “Oh, next year, next year”, “Oh, one of these days, I know I should do it.” “I’ll get around to it.” And meanwhile, your money is sitting in a savings account earning less than 1% interest, so you don’t even have the C factor (compounding) of the McT formula working for you. You can really shoot yourself in the foot by not understanding that yes, time is important and getting started early is important, but so is your ability to invest well and to invest wisely and get your money really working for you. That may save you from having to put in massive more amounts of money.
Lots of people over 50 are very concerned about their retirement. They realize they are getting started very late, but the good news is it’s never too late. Throughout my Wealth Heiress book, I’ve talked about women who started late and still ended up with a very comfortable retirement because the women invested well. Some even ended up very wealthy in their retirement. Lots of things are possible for you, but not if you don’t get started. Not if you don’t take action. If just sit there and get depressed and say, “I should do something”, “Yeah, I know I need to do something”, “I need to get started.” “Yeah, I know my bad.” That’s not going to help you. There’s times when you can delegate things to your partner or spouse and take a less active role, but this is one of those times where it’s important for you to start taking a more active role.
The most empowering thing you can do is to get educated. That’s why I created a place for you to get education with what you need to know to get your retirement moving in the right direction, where to invest, how to reach stock market compounding returns over the long-term. It doesn’t matter to me how much or little money you have, how much or little experience you have. You need to know what’s going on, not only for now, but also for the future because the future is going to be different than the past. We’re going to have unique challenges that we haven’t had in the past and it can be overwhelming to try to figure it all out on your own. So if you’re ready to take control of your money and gain financial knowledge and confidence, check out the Be Wealthy & Smart VIP Experience.
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