Investing Truths: Start Early for Best Results
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A significant number of young people are not investing in the stock market, and the implications of that fact are staggering: Like their parents before them, for many of them retirement won't happen at all.
Bankrate.com did a survey of millennial attitudes toward investing in stocks. In case you aren't aware, millennials are people younger than 34, the other end of the spectrum from today's baby boomer retirees.
Roughly 1 in 4 own stocks, according to the survey. Of those that don't invest, the reasons are both compelling and frustrating. More than half said they don't have the money to invest. And 21% said they don't know enough about stocks to invest.
The remainder cited mistrust of stockbrokers and fear of paying too much in fees. Of all the reasons, these last two we find the most legitimate, but whatever the reason, the kids just aren't that into investing.
Yes, they could cut back on other things they do spend money on — like eating out, vacationing and expensive gadgets — and find a way to get started. As a group, they have unusually high student debts, we know, but saving and investing is a habit that starts with willpower.
Here's the really big problem. If they don't start now, the habits won't form. And if they fail to invest early enough, they lose the awesome power of compounding.
Compounding is magic. If you invest $1 today, it turns into $2 in some period of time. Maybe that's a few years, maybe longer. But it will double.
Then your $2 turns into $4, and $4 turns into $8 and so on. Over the course of a working life, money saved early is the yeast that causes the bread to rise and rise and rise.
Imagine you are 25 and planning to save for 30 years. You target $5,000 a year and earn an 8% annual return over those years. Some years more, some years less, but it averages out to 8% a year, a return commensurate to a portfolio with a healthy allocation to stocks.
Three decades on, your account reaches $625,124. Great!
Now, let's say you don't invest in stocks. You just put money in a bank account and earn a CD rate. It's crazy low now, but imagine you average 2% over the decades. Your account at the end of the run is $205,644. Big difference.
Now let's say you get religion on investing but you get started late. You hold off to 45 to begin investing. You now have 10 years to make it happen. How much cash will you need to set aside to get the same result?
If you do the $5,000, you are going to end up 10 years later with just $76,736. In fact, to get a result comparable to our young, steady investor, you will have to target $41,000 a year into your retirement accounts.
Or, you could save just $5,000 and hope you get a return of 39.5% a year for all 10 of those years. Either way, that's how it breaks down.
The takeaway here is that doing nothing is not really going to work out. You might think you have all the time in the world to save for retirement, but the truth is these next few years are much, much more valuable to your long-term results than the later years, when you might or might not have a higher income.
Once they pass, they pass. There is no do-over, no trick shortcut to retirement. It's time, diligence and good habits from the start, not luck, fortune or know-how. Go get started now.
This article was written by Mitch Tuchman from Forbes and was legally licensed through the NewsCred publisher network.