To Retire Young, You Should Invest Young

I am indebted to Eileen Ambrose for an article in the Baltimore Sun that was re-printed in my local paper for the inspiration and also the Generation X and Generation Y statistics in this blog.

45 % of Generations X and Y, the post baby boomers with generation Y being the youngest of the working professionals starting at age 21, said that they would invest in an IRA this year (retirement accounts that grow with either up-front money taxed with the growth tax free or untaxed money that grows untaxed and is only taxed at your income rate as you pull it out in retirement).  And if these investors had $ 5000 to spare, only 16 % said they’d invest it in an IRA. 

One reason for the lack of enthusiasm is that the market was volatile as most December markets are when the poll was done according to Stuart Ritter, a senior financial planner at T. Rowe Price.  Investors also thought the S & P lost money last year even though with dividends it was up 2 %. 

I will say that these Gens who don’t invest are making a terrible mistake.  Here’s why.

First off, the stocks didn’t do great on the general indexes last year.  Guess what?  The Yankees have lost the most World Series in history.  They also won the most World Series in History, way more than they lost.  They got there so many times that even with a great winning percentage they still had a lot of losses.  Stocks are the same way.  You are investing over perhaps a 44 year period if you are very young.  This puts the law of averages in your favor; especially since the statistics about last year’s bad performance of the S & P were dealing with unmanaged funds based on the stock index, not funds with professionals investing and moving money to avoid losses and increase gains.

Oh, but professionals handled the Wall Street banks, and they got into trouble   But these firms had trouble in a sentence because they were forced by Congress to take the risks that they took as Congress turned banks into welfare agencies.  Your funds are segregated from this.  

To continue, you see the mistake in not investing money young is found in the theory of 72.  If you take your interest rate you are receiving and divide it into 72, this tells you how long it takes your money to double.  The fact is in a moderate growth retirement account that is managed, if you invested $ 1,200 the first year at age 21 with 8 % growth, when you reached 65 the first $ 1,200 invested would be worth $ 35000.   You would have 3 quarters of a million dollars at retirement total which in today’s dollars with 3 % infltion would be worth $ 230,000.  And you would be able to invest a lot more than that if you put your mind to it. (Remeber too, if inflation is higher, stocks grow with it because they act as a commodity). 

The problem with not investing young; you don’t get money getting hit with compound interest over a much longer time.  Do the same investing I showed above at age 40 and the first $ 1,200 invested at 40 at age 65 only grows to $ 7,500.  The total investments will be worth a total of $ 110,000 at 65 and be worth $ 60,000 in today’s dollars.  And if you leave it in a savings account with today’s interest rate of point one percent (.1%) on regular savings, your money deposited today will double in 720 years. 

Even in a bear market (a sustained downturn over 20 %) , stocks in a managed diversified portfolio will still retain most of their value only to bounce back in two years or sooner.  Many managed porfollios still grow.  To retire young, you need to invest young in something real. 

So, what are you waiting for?