Start Saving at 30 Not 40 If You Want to Be a Millionaire
In 1999, ABC had a bona fide hit with Who Wants to Be a Millionaire? Up to 35M viewers tuned in each week to see if anyone could run the gauntlet of 15 questions to win the $1,000,000. A big part of the appeal was the life changing grand prize. A million dollars.
You could quit your job! You’d be set for life!
Not exactly. As No. 2 pointed out in Austin Powers, $1,000,000 isn’t what it used to be.
$1,000,000 is still a big, magical number. But in 2021, that life changing number is probably closer $2M, or more, depending on your lifestyle. Whatever your specific number is, retiring stress free and in comfort is the ultimate goal for most of us. The good news is that achieving financial independence is entirely possible. You just need to set your number, start saving, and invest.
Start saving at 30, not 40
When you graduate from college and start your first job, saving is hard. You likely have student loans, credit card debt, rent, and other bills to pay, and all on an entry level salary. If you can start saving and investing by the time you turn 25, that’s amazing, and the rewards will be too. You’ll achieve financial independence earlier and retire with significantly more money. But if you’re like most people, saving in your 20s falls into the I’ll get to it later category.
At 30, however, you’re likely well into your professional career and earning more than you spend. Now is the time to start saving. And when I say saving, I mean methodically and consistently, every month. If you wait until you’re 40, you'll miss out on 10 years of compounding interest. That lost decade of saving and investing translates into retiring later, and leaving hundreds of thousands, possibly millions, on the table.
Don't get me wrong, if you start saving at 40, you can still achieve your goals. It just requires that you contribute at a much higher rate. The more time your savings can compound, the more money you’ll end up with. And because of the strength compound interest builds over time, it's hard for the person who saves a lot late to catch the person who saved a little early. The following table illustrates this concept using an investment account starting at $0 and earning a 10% return.
How much will you need to save?
Start by working backwards from your goal. If you want to retire at 65, you should save enough to live off of for 30 years (we’re optimists). If you want to retire at 55, you’ll have 10 less years of income and 10 more years of retirement to pay for.
Next, you’ll need to estimate what your expenses will be once you’ve retired or entered your post-professional life. This includes housing and lifestyle. Will you be living in a home you’ve already paid off, or will you be taking on a new mortgage? Will you be traveling a lot? Golfing? Dining out? You’ll also need to factor in health care. Medicare will help, but you’ll still have premiums, co-pays and prescriptions. To ball-park this figure, you can estimate that your retirement expenses will be around 80% of what you're living off today.
Last, the real (adjusted for inflation) rate of return on your investments will matter greatly. The more conservative you invest, the more you will need to save.
Hitting your number
Let’s say you’re 30, and you’ve done the math. You have $50,000 in retirement assets and you’d like to retire at 60, so you have 30 more years to save and invest. After estimating your expenses, you determine that you’ll need $60,000 per year above Social Security (current maximum benefit is $3,895/month) to support your lifestyle. $60,000 x 30 years of retirement = $1.8M. If you contribute $1,000 per month to your existing retirement account and earn a 10% average annual rate of return, you’ll hit your number at age 57. In fact, by 57, you’ll have hit your number and will be able to coast on your interest and cease your monthly contributions. This is how many investors define financial independence. And it’s important to note that the $1,000 you’ll need to contribute each month includes your 401K contributions and your employer’s match, so the additional funds you’ll need to come up with are likely closer to $500.
$500 a month might seem steep, even if you’re making $120,000+ a year. We disagree. It’s really a matter of identifying things you really don’t need, and cutting them out. Unused cable channels, buying clothes you never wear. Overspending on your house, car, or vacations. Or cutting out $1,000 habits, like buying Starbucks ($6 x 5 = $30/week, $1,560/year) and eating lunch out ($30 x 5 =$150/week, $7,800/year) every day. These are habits you can break to free up money for your plan.
Saving isn’t about depriving yourself. It’s about being deliberate about what you spend, and scaling back on inconsequential choices. Change your default from spending to saving and you’ll find the $500.
Investing your savings
Savings need to be invested to drive real wealth creation. It’s hard to believe, but many smart, successful professionals are disciplined enough to save tens of thousands of dollars, but they let it sit in cash.
Investing in a low-cost, total stock fund has historically earned 10% per year. This easily beats inflation and the fractions you earn in cash accounts. Stocks also pay dividends that can be reinvested, compounding your investment gains. We understand that nothing in the investment world is guaranteed and past performance does not predict future results. We also recognize there have been some bad years for the stock market. But starting early gives you time to ride out the inevitable bumps in the road. Remember, it’s a marathon, not a sprint, and having a long-term time horizon and reasonable return targets will position you to achieve financial freedom within your timeframe.
My parents divorced when I was five, and my brother and I grew up in two single income households. My mother was a social worker and my father ran his own business, but both ran a tight ship when it came to daily spending. They always drove used cars, we ate most meals in and back to school shopping was definitely more about function than form. But my parents were not cheap, they just prioritized. We went to great schools, had nice vacations, and when we were kids, Christmas was the best day of the year. The lesson I learned was that by deliberately choosing how they spent money, and saving up, they could afford to spend on things that were more meaningful and important. When I started working summer jobs, I leaned into this perspective, and evaluating expenditures as a matter of course soon became a lifelong habit.
To make progress towards your goals, you need to make being deliberate about what you spend money on a habit. Does it taste better if I buy Starbucks at the store or brew it at home? Is a sandwich from a shop really better than one you make yourself? These habits are choices. And you can choose to make new habits.
Paying yourself first
We call methodically saving and investing paying yourself first. When you get your paycheck, take the $500 out first and put it into your investment account. Make your plan the top priority. Because at the end of each month, we all check to see what’s left over, and typically spend it one way or another. And that’s fine. Enjoy a great dinner or take a weekend getaway, just make sure you’ve taken care of your actual goal first.
That $500 is paying for you to be financially independent and living life by design when you retire. Your future self shouldn’t be a distant abstraction, like a gray, forlorn uncle you have no attachment to. That’s you and your family, living where you want to, spending time on projects you care about, traveling, visiting friends, free from stress and living comfortably. That future self is you, answering the last question correctly, and winning Who Wants to Be a Millionaire.
If you'd like to discuss your goals for retirement or for leaving the corporate world early, schedule a meeting with one of our fiduciary advisers. We'd be happy to help you create a workable plan.
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