When you are slogging through the middle miles of a marathon, I imagine it’s hard to think about anything other than the moment. The burning muscles, sore feet and pounding heart you almost certainly experience mid-race make it pretty hard to get too far ahead in your thinking. I suppose you might also be envisioning the sweet relief of the finish line -that moment when the hard work and sacrifice is rewarded – and anticipating the sense of accomplishment you’ll feel when you can look back and say, “I did it!”
What you probably aren’t giving much consideration in the moment are the days and weeks after the race is completed.
As a young Money Marathoner, you almost certainly won’t be thinking too much about retirement either. It so far in the future and you’ve got plenty of other money considerations in the here and now to keep your busy – but this is precisely the time to give it a sliver of your attention.
Now you may be thinking, “Look Pops, you already convinced me to set aside 10% of my pre-tax income for my retirement fund. What else can I possibly be doing for something so far out in the future?”
The truth is, not much. The most important thing you can do right now in the early miles of the Money Marathon is to set aside a good portion of your income for investment. Recall that you have the big advantage of time and the wonders of compound interest on your side to help grow your earliest savings into a big chunk of change for later. If you give retirement no other service than this early in your Money Marathon, you’d still be ahead of most.
But…to make sure you understand how big an advantage it is to buckle down and make the life-style crimping sacrifice of saving now for the long haul, lets consider the following scenario of a likely interaction you’ll have with a friend who is at about the same point in their Money Marathon as you are:
“….Wow, I love your apartment!” You tell your excited friend who invited you over to see the new place they just moved into. You friend, like you, has recently begun their career after college, and their place really is something to drool over.
“Awesome, right?” your friend replies, “I searched for this baby for 3 months!”
“Well, it was worth the wait,” you answer. “Its beautiful, and your view is amazing.”
“It’d better be. This place costs me a fortune.”
“Oh I bet. Do you mind if I ask, how much?”
“Two grand a month.”
Whoa. All of a sudden, you feel like you’ve just jumped into 38 degree water. Your body stiffens and it takes everything you’ve got to not gasp violently…
“Only $2K per month?” you manage to get squeak out, “I’m so jealous, and really happy for you.”
But, your not. What you are really thinking is, “Holy crap, I know they make about the same amount of money as I do. How can they possibly afford to pay $2K a month for their place?…”
The truth is, they probably can’t.
What they are probably are doing is racking up pretty hefty credit card bills – and making those flexible minimum payments – to cover other monthly costs. They might even be using their credit card for some of their other required expenses like groceries, because their rent for this beautiful place is taking a big part of their take-home pay.
The other thing they are almost certainly not doing?
Setting aside 10% to their retirement account and another 20% of their take home pay to their other savings investments.
Now, back to our imaginary friend…
…You want to ask how they can save any money, but you don’t. Better to leave it a alone, you think to yourself. However, when you get home to the very unremarkable 2-bedroom apartment that you share with a roommate because you are saving for future, you just can’t help but ponder:
“I know what Pops says, but maybe I could just put off the saving for a while so I could a nice place of my own too. I’ve graduated college. I have a real job. I’m an adult, dang it! Yeah, I deserve it. Just until I get a few raises at work. Then I’ll start to save…”
Pit of Pain alert!
It’s easy to fall into this trap, especially when you see friends and acquaintances seeming to be doing so much better than you. Everyone – and I mean everyone – falls victim to the comparison bug sometimes, but it’s really important to not let it change your commitment to “Pay yourself first, Pay others second,” and to start this practice as soon as possible.
To help you visualize just how important it is not to defer saving until later, take a look at this graph which shows the impact in the future on postponing savings:
The red line represents the amount of money you’d have if you saved $1 every year for 22 years and left it alone to compound with 8% annual return on your investment. The blue line shows you how much you’d have with the same return and compounding, but you postponed saving for the first 4 years so that you could spend that $1 on a nicer apartment, car, clothes, etc. At the end of 22 years, you’d have roughly 50% more in your investment fund by starting your saving immediately in Year 1.*
Here’s some added detail that demonstrates how valuable it is to save early:
| Your Contributions after 22 Years | Total Value after 22 Years (8% ann.) | Earnings on Contributions | |
| Start Year 1 | $22 | $59.89 | $37.89 |
| Start Year 5 | $18 | $40.45 | $22.45 |
| Difference | 22% | 48% | 69% |
While some of the bump in savings is coming from the fact that you actually contributed more dollars directly ($22 vs. $18 – 22% more), the earnings (the money your contributions made while invested) over the 22 year period are 69% higher because you started earlier. By starting earlier, your money is doing more work for a longer period which means you are doing a better job of paying yourself first.
If these statistics aren’t enough to convince you, let me add on.
In the category of “a good problem to have,” – at least I think it is – an important reason to start saving as early as possible for retirement is that people are now living longer, healthier lives than ever before. I won’t get into all the statistics and the caveats, but assuming you live a healthy lifestyle, it is very reasonable that you can expect to live into your 90’s, and 100 is not out of the question at all. Since a primary goal of this blog is to help you find a way to reach a point before you are 50 years old that, financially, you can do whatever you want to with your trips ’round the sun, its important to save for a period of “retirement” that could span 50 years or more.
It’s important to understand that “retirement” can mean many things. If you love your career or the business you’ve built, that might mean you just keep on working, even if its part time. Nothing wrong with that at all. If you continue to work and you can dictate how/where/when you do work because you don’t need to work, I call that Financial Independence, but some might equate it to retirement too.
If you’d like to travel the world, give back through volunteer or mentoring opportunities, or even just relax with friends and family – and you want to start doing it well before you reach the age of 67 (a common retirement age) and without having to hold down a full-time job – you must plan to save enough money to ensure you’ll still be able to pay the bills all the way out to 100 or beyond.
Hopefully, I’ve convinced you that a bit of sacrifice and creative planning early in your working years so that you can start right away funding your retirement not only makes sense, but is also completely worth it. The sooner, the better.
* All this silliness about investing $1 a year is just to make the example easier to follow. It’s also a little silly to think that you will a) invest the exact same amount every year for 22 years, and b) that your annual return will be exactly 8% every year. You won’t, and it won’t. There’s are other assumptions about the timing of the investment and when the 8% return will be realized each year that aren’t realistic. So, for anyone who reads this and is math stickler who gets caught up in the details, I say, “Relax….it’s just a model, but it makes the point.”
The Money Marathon 