Author Topic: Invest Young, your money is worth more  (Read 8493 times)

FIPurpose

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Invest Young, your money is worth more
« on: March 02, 2015, 02:06:43 PM »
I was thinking about how many people my age prefer to spend the money they have now, and wait till they are in their 40s to begin saving for retirement. So I came up with a question for myself to investigate:

What is a $1000 in a retirement account from a 20 year worth at retirement?

I assumed retirement to be at 65, and I figure that this is still applicable to many mustachians since many here decide to work into retirement, even if part-time, and find that they don't touch their stache. (I could see myself working part-time till old age, and not touching any retirement account money till old age).

So I developed this chart to show the diminishing return on your money into retirement. So, money invested at 20, has a total return of about 3,100% by the age of 65.

I myself, am planning on hitting about $750k by the age of 28, and then probably work part-time for 20 years. During that 20 years and a ripe old retirement of 48, I'll have gained 325% total return or about $2.5M.

Obviously we can't delay consuming money forever, but these numbers let me see the same idea from a different angle, and show that the power of compounding can let you move to part-time work much earlier than maybe initially thought.

Hope this helps someone out there.

Jags4186

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Re: Invest Young, your money is worth more
« Reply #1 on: March 02, 2015, 03:05:23 PM »
I was thinking about how many people my age prefer to spend the money they have now, and wait till they are in their 40s to begin saving for retirement. So I came up with a question for myself to investigate:

What is a $1000 in a retirement account from a 20 year worth at retirement?

I assumed retirement to be at 65, and I figure that this is still applicable to many mustachians since many here decide to work into retirement, even if part-time, and find that they don't touch their stache. (I could see myself working part-time till old age, and not touching any retirement account money till old age).

So I developed this chart to show the diminishing return on your money into retirement. So, money invested at 20, has a total return of about 3,100% by the age of 65.

I myself, am planning on hitting about $750k by the age of 28, and then probably work part-time for 20 years. During that 20 years and a ripe old retirement of 48, I'll have gained 325% total return or about $2.5M.

Obviously we can't delay consuming money forever, but these numbers let me see the same idea from a different angle, and show that the power of compounding can let you move to part-time work much earlier than maybe initially thought.

Hope this helps someone out there.

Out of curiosity, what do you do that will allow you to amass 750k by the time you are 28?

KCM5

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Re: Invest Young, your money is worth more
« Reply #2 on: March 02, 2015, 03:26:07 PM »
I have a slightly different time frame, but a similar plan. We're going for 500k in retirement accounts, a partial pension, and then not touching that however we can (probably part time work for both of us but maybe one or both will work full time) until we're old/comfortable beginning withdrawals. Once we hit $500k we're going to travel for a couple of years and then emigrate, so that's why I'm not sure how we're going to do the working.

But in general I guess my point was that obviously the math works better to buckle down when you're young than panic when you're getting old.

FIPurpose

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Re: Invest Young, your money is worth more
« Reply #3 on: March 02, 2015, 09:03:31 PM »
I was thinking about how many people my age prefer to spend the money they have now, and wait till they are in their 40s to begin saving for retirement. So I came up with a question for myself to investigate:

What is a $1000 in a retirement account from a 20 year worth at retirement?

I assumed retirement to be at 65, and I figure that this is still applicable to many mustachians since many here decide to work into retirement, even if part-time, and find that they don't touch their stache. (I could see myself working part-time till old age, and not touching any retirement account money till old age).

So I developed this chart to show the diminishing return on your money into retirement. So, money invested at 20, has a total return of about 3,100% by the age of 65.

I myself, am planning on hitting about $750k by the age of 28, and then probably work part-time for 20 years. During that 20 years and a ripe old retirement of 48, I'll have gained 325% total return or about $2.5M.

Obviously we can't delay consuming money forever, but these numbers let me see the same idea from a different angle, and show that the power of compounding can let you move to part-time work much earlier than maybe initially thought.

Hope this helps someone out there.

Out of curiosity, what do you do that will allow you to amass 750k by the time you are 28?

I am a software engineer and my wife works for the financial industry. We have no kids, and make about 120-130k combined. Yep, definitely wouldn't be able to do it without her.

We're planning on hitting $100k in investments later this year (I'm thinking sometime around my 24th birthday).

Jags4186

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Re: Invest Young, your money is worth more
« Reply #4 on: March 03, 2015, 07:31:31 AM »
Looks like you'll need some serious investment gains to hit that 750k goal by 28 ...best of luck!

Middlesbrough

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Re: Invest Young, your money is worth more
« Reply #5 on: March 03, 2015, 07:45:24 AM »
Another fun excercise I like to engage in is what income could be created at retirement in x years given y return rate and z withdrawal rate.

Percentage=z*(1+y)^x

Considering I am young, even conservative return rates and withdrawal rates show that for every dollar I save could create 40 to 75 cents of income at 65. If you save a year's worth of expenses young, almost all the worry about retirement is gone. Keep doing it every year and be FI in a hurry.

Cromacster

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Re: Invest Young, your money is worth more
« Reply #6 on: March 03, 2015, 08:05:39 AM »
The exercise I enjoyed was looking at the amount I would need today if I stopped investing and planned a traditional retirement at age 60. 

I figured I could have stopped any contributions when I was 26 and I would have around 2mm by the time I hit retirement age.

Sort of sobering when you realize how easy it is when you start young.

dandarc

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Re: Invest Young, your money is worth more
« Reply #7 on: March 03, 2015, 08:27:07 AM »
The exercise I enjoyed was looking at the amount I would need today if I stopped investing and planned a traditional retirement at age 60. 

I figured I could have stopped any contributions when I was 26 and I would have around 2mm by the time I hit retirement age.

Sort of sobering when you realize how easy it is when you start young.
I've got something similar to this set up to "Retire" on my wife's 67th birthday ('cause Social Security! and stuff).  This predates anything MMM, but I keep it around.  It currently says we could start drawing $500 / month today and still have a 4% withdrawal rate supporting our current spending when that rolls around (She's 33 and I'm 32 now).  Kind of fun to look at!

sheepstache

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Re: Invest Young, your money is worth more
« Reply #8 on: March 03, 2015, 08:49:03 AM »
The exercise I enjoyed was looking at the amount I would need today if I stopped investing and planned a traditional retirement at age 60. 

I figured I could have stopped any contributions when I was 26 and I would have around 2mm by the time I hit retirement age.

Sort of sobering when you realize how easy it is when you start young.

That's something I find funny when people look at me in horror when I tell them how much I save now in my early 30s. It's as though I've cast a death sentence on myself and will have to remain this frugal for the rest of my life. But the fact is this means I could choose to turn into a big spender at any moment and still be set for regular retirement.

You'd think since saving money is so difficult for most people they'd take steps to have to do less of it ...

FIPurpose

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Re: Invest Young, your money is worth more
« Reply #9 on: March 04, 2015, 12:20:24 AM »
Looks like you'll need some serious investment gains to hit that 750k goal by 28 ...best of luck!

Funny enough, when I post an out there investment goal on this forum. Someone says that it would take something special to happen. I haven't missed a target yet.

Not to say that it is a guarantee now, but I am optimistic about hitting the target.

FIPurpose

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Re: Invest Young, your money is worth more
« Reply #10 on: March 04, 2015, 12:38:35 AM »
Also I loved the idea of what a dollar today means for annual income in retirement. I'd love to hear if anyone else had their own way of seeing things.

rpr

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Re: Invest Young, your money is worth more
« Reply #11 on: March 04, 2015, 01:54:23 AM »

Looks like you'll need some serious investment gains to hit that 750k goal by 28 ...best of luck!

Funny enough, when I post an out there investment goal on this forum. Someone says that it would take something special to happen. I haven't missed a target yet.

Not to say that it is a guarantee now, but I am optimistic about hitting the target.
It is good to be optimistic but I'm trying to get a handle on your numbers

You have 100k now.
Income is 130k
Taxes guess 25k
Expenses guess 35k
Savings 70k/year

Let's ignore taxes for now. What rate of return would you need to reach 750k in the next four years?

Answer: 25%.



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Self-employed-swami

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Re: Invest Young, your money is worth more
« Reply #12 on: March 04, 2015, 02:01:27 AM »
I am 30, my husband is 32. In a few months we will have $250,000 in our long term savings and retirement accounts. We started seriously saving about 3 years ago, and we also own a home with $300,000 in equity in it.

We've only both had full time jobs at the same time for 6 months in the last 5 years. My husband will start another full time job next week, and I am still collecting a salary from my business in the slow season. I can't wait to ramp up the savings even more!

Retire-Canada

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Re: Invest Young, your money is worth more
« Reply #13 on: March 04, 2015, 06:43:58 AM »

What is a $1000 in a retirement account from a 20 year worth at retirement?


If I get access to a time machine I'm going back and getting my younger self to invest a lot more a lot earlier!

-- Vik

KCM5

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Re: Invest Young, your money is worth more
« Reply #14 on: March 04, 2015, 07:31:07 AM »

Looks like you'll need some serious investment gains to hit that 750k goal by 28 ...best of luck!

Funny enough, when I post an out there investment goal on this forum. Someone says that it would take something special to happen. I haven't missed a target yet.

Not to say that it is a guarantee now, but I am optimistic about hitting the target.
It is good to be optimistic but I'm trying to get a handle on your numbers

You have 100k now.
Income is 130k
Taxes guess 25k
Expenses guess 35k
Savings 70k/year

Let's ignore taxes for now. What rate of return would you need to reach 750k in the next four years?

Answer: 25%.



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Perhaps the OP is assuming very large income increases? Or if $130k is what they're saving annually then a simple 8.5% return would get them there.

Jags4186

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Re: Invest Young, your money is worth more
« Reply #15 on: March 04, 2015, 07:38:23 AM »
Hard to save 100% of your gross income...

mak1277

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Re: Invest Young, your money is worth more
« Reply #16 on: March 04, 2015, 09:28:32 AM »
I think this depends heavily on your expected earnings over the course of your career.

Personally, I didn't contribute anything to my 401(k) for the first 5 years of my career.  Nothing...zero.  And I was basically spending everything I earned.  But I've gone back and recalculated what I missed out on (assuming my contribution would have been enough to get the maximum match), and assuming a 4% real ROR, the impact is less than 1.5% of my net worth.

Moral of the story...if you can avoid lifestyle creep and can get to a high paying career, missing out on early contributions in your 20s is fairly irrelevant.

WildJager

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Re: Invest Young, your money is worth more
« Reply #17 on: March 04, 2015, 10:33:50 AM »
Looks like you'll need some serious investment gains to hit that 750k goal by 28 ...best of luck!

Funny enough, when I post an out there investment goal on this forum. Someone says that it would take something special to happen. I haven't missed a target yet.

Not to say that it is a guarantee now, but I am optimistic about hitting the target.

For what it's worth, I am at a similar family pay grade, also no kids.  I'm currently 28, and net worth is just shy of $700k.  Realistic goal in my opinion if you're conscious about your savings rate and taking advantage of any tax savings you can.  Once you get the momentum going wealth accumulates at a ridiculous rate.  Good luck!

Kaspian

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Re: Invest Young, your money is worth more
« Reply #18 on: March 04, 2015, 10:48:18 AM »

What is a $1000 in a retirement account from a 20 year worth at retirement?


In theory, yes!  I began back in the bad old days of 1996 before "index investing" came up in any search engine and firms hid their management expense fees from the clients.  I gave the advisor $2000 and he showed me a very good tax sheltered labour fund (Vengrowth II) and a few other things.  I was 25 and felt like such a grownup.  That portfolio is now worth....  Wait for it...  $135!  Yay!!!  They took $2000 and magically made it $135.  Ah, the awesome power of compounding at work.  And you know what?  The friggn' Vengrowth account has been locked for the past decade (no investors have been allowed to remove their money or buy more), it's been sold to Convington and I think I can finally get it out at the end of this year.  Lots of retirees have already died without seeing their savings. (Money which would have been a pittance anyway compared to what they put in.)  We've all been paying an annual management fee on a fund which wasn't even being managed.  ...Assholes!

So, yeah--in theory you should have a fortune by putting away a few grand young, but that's not always the case.  ...And there are lots of people who didn't sell at the bottom of the '08-09 market, didn't speculate in real estate, and still lost everything through the firms they invested with. 

Chuck

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Re: Invest Young, your money is worth more
« Reply #19 on: March 04, 2015, 10:59:32 AM »
I think the OP must be factoring in income increases, and the savings increases that would come along with them.

Then the numbers make a bit more sense.

Sid Hoffman

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Re: Invest Young, your money is worth more
« Reply #20 on: March 04, 2015, 11:45:45 AM »
It is good to be optimistic but I'm trying to get a handle on your numbers

You have 100k now.
Income is 130k
Taxes guess 25k
Expenses guess 35k
Savings 70k/year

Let's ignore taxes for now. What rate of return would you need to reach 750k in the next four years?

Answer: 25%.

I have a few minutes to look into this myself, so I figured I'd give it a try too.

Gross of $130k
-$6650 HSA
$123,350 ($9450 towards FICA)
-$2500 Medical benefits
-$36,000 401k x2
-$11,000 IRA x2
-$20,600 Standard deduction + personal exemption x2
---------------
$53,250 AGI

This AGI falls to more than $6000 under what I see appears to be the AGI cap for deduction of IRA contributions.  Someone correct me if I'm doing this wrong, but yesterday when I asked the same question I was basically told that's right.  The current phase-out start for MFJ and TIRA deductions seems to be about $60,000.

For married filing jointly that should be $7080 federal income tax.  No idea what he's paying in state, but I've seen it frequently run around 20% of federal for married couples in a lot of states, so let's estimate $1416 state.

Total taxes: $7080 fed, $1416 state, $9450 FICA for a total of $17946 in taxes.

So divided up it appears to work as follows:
$130k gross:
$18k taxes
$2.5k medical insurance
$57.5k tax advantaged savings (lowball estimate of 3% 401k matching and no HSA match)
------------------
$55k left over

If they truly are hardcore saving, I'm going to estimate spending is even lower at $30k.  That leaves $25k to invest after taxes for a total of $82,500 saved per year, with more than 2/3 of that amount in tax advantaged accounts.  Still, even the after tax money is going to be almost entirely tax-free since they are well within the 15% tax bracket, and both dividends and long-term capital gains are taxed at 0% when you're within the 15% bracket.  So for the sake of this example I am willing to say we can consider ALL of the money invested to be accruing value and dividends tax-free.

OP says he's going to have $100k when turning 24.

Age 24: $100.0k * 1.07 + $82.5k = $189.5
Age 25: $189.5k * 1.07 + $82.5k = $285.3
Age 26: $285.3k * 1.07 + $82.5k = $387.7
Age 27: $387.7k * 1.07 + $82.5k = $497.4
Age 28: $497.4k * 1.07 + $82.5k = $614.7
Age 29: $614.7k * 1.07 + $82.5k = $740.2

If we revise age 29 to be "age 28 years and 364 days" then I can see it being very plausible that he could reach around $750k while technically still being age 28.  That's based on a consistent 7% ROI, which I see as overly aggressive when rated against the rate of inflation, but OTOH he's young and statistically very likely for he and his wife to get big raises in the next 10-15 years.  I see his plan as very much doable, especially if the idea is to keep working to age 35 or so.
« Last Edit: March 04, 2015, 11:47:23 AM by Sid Hoffman »

andy85

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Re: Invest Young, your money is worth more
« Reply #21 on: March 04, 2015, 11:53:39 AM »
Also I loved the idea of what a dollar today means for annual income in retirement. I'd love to hear if anyone else had their own way of seeing things.
here is how i look at it...every $25k in my retirement funds buys me $1000 in perpetuity (below is based on 4% SWR)

Indefinite IncomePortfolio Size
100025000
200050000
300075000
4000100000
5000125000
6000150000
7000175000
8000200000
9000225000
10000250000
11000275000
12000300000
13000325000
14000350000
15000375000
16000400000
17000425000
18000450000
19000475000
20000500000
21000525000
22000550000
23000575000
24000600000
25000625000
26000650000
27000675000
28000700000
29000725000
30000750000
31000775000
32000800000
33000825000
34000850000
35000875000
36000900000
37000925000
38000950000
39000975000
400001000000



rpr

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Re: Invest Young, your money is worth more
« Reply #22 on: March 04, 2015, 12:25:23 PM »

OP says he's going to have $100k when turning 24.

Age 24: $100.0k * 1.07 + $82.5k = $189.5
Age 25: $189.5k * 1.07 + $82.5k = $285.3
Age 26: $285.3k * 1.07 + $82.5k = $387.7
Age 27: $387.7k * 1.07 + $82.5k = $497.4
Age 28: $497.4k * 1.07 + $82.5k = $614.7
Age 29: $614.7k * 1.07 + $82.5k = $740.2

If we revise age 29 to be "age 28 years and 364 days" then I can see it being very plausible that he could reach around $750k while technically still being age 28.  That's based on a consistent 7% ROI, which I see as overly aggressive when rated against the rate of inflation, but OTOH he's young and statistically very likely for he and his wife to get big raises in the next 10-15 years.  I see his plan as very much doable, especially if the idea is to keep working to age 35 or so.

Yes, if you add two extra years!!

The way I see it.

Age   Portfolio when OP turns Age
24   100.00
25   189.50
26   285.27
27   387.73
28   497.37
29   614.69
30   740.22

dandarc

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Re: Invest Young, your money is worth more
« Reply #23 on: March 04, 2015, 01:56:10 PM »
I have a few minutes to look into this myself, so I figured I'd give it a try too.

Gross of $130k
-$6650 HSA
$123,350 ($9450 towards FICA)
-$2500 Medical benefits
-$36,000 401k x2
-$11,000 IRA x2
-$20,600 Standard deduction + personal exemption x2
---------------
$53,250 AGI

This AGI falls to more than $6000 under what I see appears to be the AGI cap for deduction of IRA contributions.  Someone correct me if I'm doing this wrong, but yesterday when I asked the same question I was basically told that's right.  The current phase-out start for MFJ and TIRA deductions seems to be about $60,000.
1.  AGI is before standard deduction / exemptions, so $73,850 (53,250 is taxable income).  No saver's tax credit (stops at 61K (2015)).
2.  The deduction limit is based on MAGI - add back tIRA contributions, so $84,850.
3.  The limits are higher than stated for married filing jointly - phase out starts at 98K (2015) of MAGI, so OP is good for the tIRA.  401K / HSA contributions have double-effect if they can get your MAGI under the IRA deductions limits.

http://www.irs.gov/Retirement-Plans/2015-IRA-Deduction-Limits-Effect-of-Modified-AGI-on-Deduction-if-You-Are-Covered-by-a-Retirement-Plan-at-Work

Sid Hoffman

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Re: Invest Young, your money is worth more
« Reply #24 on: March 04, 2015, 07:34:05 PM »
1.  AGI is before standard deduction / exemptions, so $73,850 (53,250 is taxable income).  No saver's tax credit (stops at 61K (2015)).
2.  The deduction limit is based on MAGI - add back tIRA contributions, so $84,850.
3.  The limits are higher than stated for married filing jointly - phase out starts at 98K (2015) of MAGI, so OP is good for the tIRA.  401K / HSA contributions have double-effect if they can get your MAGI under the IRA deductions limits.

http://www.irs.gov/Retirement-Plans/2015-IRA-Deduction-Limits-Effect-of-Modified-AGI-on-Deduction-if-You-Are-Covered-by-a-Retirement-Plan-at-Work

Sweet - I had a feeling I had to have something wrong.  I know that along the way I asked my CPA who does my taxes if it was better to contribute to a standard or roth IRA, and being told that if I contributed to a traditional, it wouldn't help me nearly as much because it wouldn't be tax deductible.  I am single, so the limits are half as much for me.  I swear, I learn something new about the tax code every day and I'm not sure that's a good thing for me or a bad thing for the rest of the world that generally doesn't know anything at all about managing their tax exposure.

nanu

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Re: Invest Young, your money is worth more
« Reply #25 on: March 04, 2015, 08:58:38 PM »
Seeing threads like these make me wish I had started investing 10 years ago, rather than in the ripe "old" age of 26 (I just feel old because only now graduating from college due to military service).
But my plan is to get to $1M net worth within 10 years between my girlfriend (most likely wife-to-be) and myself - with incomes of $150K and $80K starting
a few months from now, this should be doable I think (despite the high COL area we'll be in)

FIPurpose

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Re: Invest Young, your money is worth more
« Reply #26 on: March 04, 2015, 11:02:54 PM »
Yes my 750k figure does include likely raises, bonuses, et al.

I'm a software engineer making 70k in the Washington, so I know there is plenty of room for increase, and I do not have a state income tax which helps. Our expenses are about 30k.

Do I know for sure? Of course not. But I think others here have shown that it is completely plausible.