Most of you will wonder why we thought this article would be helpful. You already understand the concepts that are to be presented but trust us and read to the end.
Imagine twin brothers. The first brother graduates from high school and goes to work as a plumber at age 18. If you have any plumbing work done, you will know the kid is fairly smart. He immediately starts funding his Roth IRA with $6000 per year. He makes an investment earning 10% annually. After ten years he has invested $60,000 and has a balance of $95,625. He makes no further contributions.
The other twin graduates and goes to medical school. This qualifies him to charge the same hourly rate as the plumber, however, he did not start to fund his Roth until age 28. He then starts to save the same $6000 per year and makes the same investment earning 10%. The question is how many years does he have to fund to catch up with his brother?
At age 65, the doctor invested $228,000 and has a balance of $2,184,261. The plumber who only invested $60,000 has a balance of $3,576,773.
There are several financial lessons here. The first being if you will make a good decision early, it will pay dividends later. This is simply the magic of compound interest. Imagine someone finishes school and starts working. They can either get a Honda or a BMW. All of their friends may be driving a BMW, but they can choose to get reliable transportation and invest the difference.
Second, be consistent in your investment decisions. Both brothers had a plan and stuck to it. Assume both brothers were investing in a mutual fund. They did the same thing every year. Some years the market would have been high and others low. They followed their plan and over a long period of time achieved excellent results.
Third, it is never too late to start. The poor doctor’s brother did manage to put away $2,184,261 for his retirement of which $1,956,261 was a return on his investment. Really that’s not all that bad if you think about it.
These are simple concepts, and I am sure all of you have a young person in your life that can benefit from understanding this information. Perhaps it is one of your children, a coworker, or a friend. It is our hope that you can pass this along to someone who will benefit.
If you have questions, please contact the Dent Moses team.