Real Life example of letting your money work for you

I have written often about the importance of saving and investing over time and although I know this and have been doing it since my first full time job I still am just amazed when I look at my portfolio and see how much it has grown over the years.  If you start saving and investing from day one of your first job and set this in motion you will be able to retire at age 50. It does not mean you have to retire that early but it is certainly nice to have that option.

As I approach the 25th anniversary of my being able to contribute to a 401K I thought it would be interesting to do an analysis of where all the money came from. Almost 60% of the money in my 401k account comes from the return on my investments. This is really amazing since, as a result my salary increases and contributions limits increases, 50% of the money I contributed was contributed in the last 8 years. So the bulk of return on investment came from the first 17 years. My first year investment is worth around 6 times what I and my employer put in!
The point I am trying to make is, if you invest early time will pay for much more of your retirement than you do yourself.

401Ks (and their equivalents such as 403bs) are one of the best ways to capture this saving. Traditional 401ks let you defer some of your current tax burden and in essence give you an interest free loan that you can invest until you take the money out. Since you don’t have to take the money out until you are 70 that can amount to almost 50 years of interest free money. Some employers now offer Roth 401ks. These are also an excellent investment vehicle; as, while they do not offer the immediate tax advantage, all the money you earn in them is tax free forever as long as you follow the rules. You would have to make some assumptions and crunch some numbers to determine which is best for you, but either one is a great way to save for your retirement so there is no wrong answer when it comes time to jump in. For recent graduates if you start from day one of your employment not only do you have time paying for more of your retirement but you will not feel any sting in making the commitment because you will never have gotten used to having the money to spend.
I am often asked will how much should I put in. The easy answer is a much as you possibly can! The more serious answer is you should be trying to save at least 20 of your salary. Your savings would include paying off debt, setting up an emergency fund and then of course long term investing. The first order of business is making sure you take full advantage of any employee matches at the very least. This beats paying of your debts (other than making sure you make minimum payments to stay out of default). If you don’t take full advantage of the employee match you are giving money away. As an example my employee matches over the past 25 years add up to over twice my starting salary even before accounting for the investment return. By not taking those employee matches that alone means working two more years.

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