The Power of Now
No matter the setback or length of the journey, the best way to get ahead in most cases is to start taking action as soon as possible then make adjustments as more information is revealed or different resources are available.
I also like to tell people:
In life, there are the things you know, the things you don’t know, and the things you don’t know that you don’t know. And it’s in the area of what you don’t know that you don’t know, where the real opportunities in life are.
The more action you take to help you learn what you don’t know, that you don’t know, will help you take advantage of the next opportunity. And if you train early and big enough, it can allow you to coast for the rest of your life.
The Financial Independence/Retire Early (FI/RE) community is generally about saving as much as possible to hit their retirement goal as fast as possible. Generally, someone needs to save 30 times their annual spending goal in an investment account to reach FI/RE. If you want to spend $50k a year, then $1.5 million is required as a rule of thumb.
The earlier someone starts this journey, the faster they can hit their goal. If someone doesn’t want to do FI/RE, they should still save up for retirement so something is available in their golden years.
Here is a classic example of two folks who want to retire at 65. We have Diego and Laura, who are the same age. Laura decided she wanted to start investing as early as possible at the age of 25. She is going to invest $500/mo until she turned 36 then stop. Diego wants to start investing when things settled down. He decided to start investing at age 35 with $500/mo and won’t stop until age 65.
Most people will assume that Diego will have more money at age 65 because he is investing for 30 years instead of 10 years like Laura, but there is a concept in physics that helps Laura out, which is:
When Diego starts at 35, Laura would have put away $60,000, but at an average return of 8%, her portfolio balance would be $91,195. After one year of invest at the age of 35, Diego will be at $6,224.96.
At age 36, Laura, without investing an additional dollar, will be at $98,790.86. This is a $7,317.84 increase in her value from the previous year and now the mass of the account will do most of the work.
The following year for Laura, at age 37, her portfolio balance is $106,694.12, a $7,903.26 increase in value. Since Laura used her 20s as velocity and contributed $500/mo, in her 30s, she can rely less on velocity and use the mass of the account to help her reach her retirement goals.
So by the time Laura is 65, her account will be $1,077,367, while Diego’s account will be $755,648. Since Diego started later, he doesn’t benefit from compounded interest like Laura. In finance, there is a concept called the Rule of 72, which gives someone a general idea of many years it will take someone to double their account based on their average rate of return. This scenario had an average return of 8%, so an investment portfolio should generally double in size every nine years.
Laura has more one more compounding effect than Diego because of when she started, and she has a much larger account that can double when she is in her 60s. If the investment portfolio is at $500k at age 52, it can be $1,000,000 at age 61.
Having this mass gives Laura more choices for her budget when she is in her 30s, 40s, 50s, and 60s. Instead of putting $6,000 into an investment account, she can put that money to use in other areas.
Laura could decide to continue to invest, so she hits retirement faster. She can spend that money on vacations and see parts of the world she always wanted to see. For $6,000, she can probably see two places a year with the right deals. It really comes down to someone’s goals on what they should do.
Final Takeaways
The best way to predict the future is to create it, and this happens by having financial, social, and human capital with goals that have an action plan. When you have these resources with the right focus, you can have the freedom to do other things that could be more valuable to you, but they have to be earned.
I joined the Marines when I was 18 years old, and now I have two bachelor’s degrees in Public Health and Economics, and an MBA, which was all paid for because of my GI Bill and how I created my education plan. These accomplishments required creating goals and then a plan to reach those goals. Some sacrifices had to be made, but now that I’m 35 years old and have less energy, I’m glad I made those investments to give myself the freedom I have now.
The best time to plant a tree was 20 years ago, but today’s next best time. Putting things off is not an excellent strategy to create a good life generally, but it’s perfectly fine to choose Diego’s method as well. Just make sure it was a thoughtful plan and not something forced upon you. We get to decide what the future can be, but it requires today’s actions to get that future.
There are people I’ve come across that retired in their 60s but started to run out of money at the age of 72, and they’re not fun conversations to have. So the less I can have these conversations, the better the world will be. So have a plan and figure out a way to increase your assets to have the momentum to reach your goals and not run out of gas.
