Investing at an early age vs late theory

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Roarindino
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Investing at an early age vs late theory

Post by Roarindino » Sat Dec 28, 2019 11:52 am

Image


I’ve seen many charts about how investing early from age 25-35 will wind up with more than someone who invests the same amount a year from 35-60. Is this entirely true given inflation?

For the above example chart, 25 year old the person has invested the money for 10 more years than the 35 year old. Plus that $600k with inflation is approximately worth $400k 10 years ago when the 35 year old turned 60. But I suppose the real benefit is the 25 year old only invested money for 10 years compared to 25 years for the other person. But the 25 year old also had to keep the money invested for an extra 10 years.

What do you think? I’m all for saving early but this argument never made sense to me. I suppose it is an oversimplification to convince people to start saving early.
Last edited by Roarindino on Sat Dec 28, 2019 12:34 pm, edited 1 time in total.

Jags4186
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Re: Investing at an early age vs late theory

Post by Jags4186 » Sat Dec 28, 2019 11:59 am

What does inflation have to do with anything?

$615k is more than $431k

FoolMeOnce
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Re: Investing at an early age vs late theory

Post by FoolMeOnce » Sat Dec 28, 2019 12:01 pm

Roarindino wrote:
Sat Dec 28, 2019 11:52 am
Image


I’ve seen many charts about how investing early from age 25-35 will wind up with more than someone who invests the same amount a year from 35-60. Is this entirely true given inflation?

For the above example chart, 25 year old the person has invested the money for 10 more years than the 35 year old. Plus that $600k with inflation is approximately worth $400k 10 years ago when the 35 year old turned 60. But I suppose the real benefit is the 25 year old only invested money for 10 years compared to 25 years for the other person. But the 25 year old also had to keep the money invested for an extra 10 years.

What do you think? I’m all for saving early but this argument never made sense to me.
Why are they reaching age 60 at different times? Imagine that these are two twins. The ending value is the same year.

The $5k/yr invested earlier was a bit more expensive than the $5k/yr the delinquent twin invested, but comparing the final balance is apples to apples.

TNWoods
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Re: Investing at an early age vs late theory

Post by TNWoods » Sat Dec 28, 2019 12:03 pm

Don't think of it as a 25 yr old and a 35 year old starting at the same time, and then compare two different ending totals separated by 10 years and then calculating money then vs money now.

Think of it as a pair of twins, one starts saving at 25, the other doesn't start till 35.

They turn 60 at the same time, and one is in way better shape than the other because of starting earlier, even though much less went into the investments.

TNWoods

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Roarindino
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Re: Investing at an early age vs late theory

Post by Roarindino » Sat Dec 28, 2019 12:16 pm

FoolMeOnce wrote:
Sat Dec 28, 2019 12:01 pm
Roarindino wrote:
Sat Dec 28, 2019 11:52 am
Image


I’ve seen many charts about how investing early from age 25-35 will wind up with more than someone who invests the same amount a year from 35-60. Is this entirely true given inflation?

For the above example chart, 25 year old the person has invested the money for 10 more years than the 35 year old. Plus that $600k with inflation is approximately worth $400k 10 years ago when the 35 year old turned 60. But I suppose the real benefit is the 25 year old only invested money for 10 years compared to 25 years for the other person. But the 25 year old also had to keep the money invested for an extra 10 years.

What do you think? I’m all for saving early but this argument never made sense to me.
Why are they reaching age 60 at different times? Imagine that these are two twins. The ending value is the same year.

The $5k/yr invested earlier was a bit more expensive than the $5k/yr the delinquent twin invested, but comparing the final balance is apples to apples.
So when you say the $5k/yr invested earlier was a bit more expensive. Can someone do the math to compare the actual cost because with inflation at age 55 the $5k/yr is actually $2.5k/yr for the 25 year old. So the 25 year old is investing double the value compared to the 55 year old.

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Re: Investing at an early age vs late theory

Post by mighty72 » Sat Dec 28, 2019 12:17 pm

Yeah, you are reading the data wrong. In the example, 2 people were born on 1/1/1960. First, started investing on 1/1/1985 and invested 5k for 11 years & then did nothing but sit on the sides. The second person started to invest 5k every year on 1/1/1995 & invested every year for 26 years
On 1/1/2020 the first guy has way more money in 2020 dollars

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Roarindino
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Re: Investing at an early age vs late theory

Post by Roarindino » Sat Dec 28, 2019 12:20 pm

TNWoods wrote:
Sat Dec 28, 2019 12:03 pm
Don't think of it as a 25 yr old and a 35 year old starting at the same time, and then compare two different ending totals separated by 10 years and then calculating money then vs money now.

Think of it as a pair of twins, one starts saving at 25, the other doesn't start till 35.

They turn 60 at the same time, and one is in way better shape than the other because of starting earlier, even though much less went into the investments.

TNWoods
If they are twins the 25 year old is saving $5k/yr to start. But 10-30 years later when the 35 year old is saving the same amount $5k but it is worth less due to inflation.

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Roarindino
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Re: Investing at an early age vs late theory

Post by Roarindino » Sat Dec 28, 2019 12:24 pm

mighty72 wrote:
Sat Dec 28, 2019 12:17 pm
Yeah, you are reading the data wrong. In the example, 2 people were born on 1/1/1960. First, started investing on 1/1/1985 and invested 5k for 11 years & then did nothing but sit on the sides. The second person started to invest 5k every year on 1/1/1995 & invested every year for 26 years
On 1/1/2020 the first guy has way more money in 2020 dollars
If they were born at the same time then the 25 year old was saving $5k/ year which is a smaller value after inflation compared to the 35 year old who started saving 10 years later. Can someone do the math to account for investing value after inflation. My math is not good enough to calculate that.

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Roarindino
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Re: Investing at an early age vs late theory

Post by Roarindino » Sat Dec 28, 2019 12:32 pm

Jags4186 wrote:
Sat Dec 28, 2019 11:59 am
What does inflation have to do with anything?

$615k is more than $431k
Inflation is important! It affects your buying power. $500k today is a lot less than what is was worth 30 years ago. A rough calculation for inflation is every 30 years the value of your money is half what it was. So in 10 years $400k is about the same value as $600k 10 years later.

HawkeyePierce
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Re: Investing at an early age vs late theory

Post by HawkeyePierce » Sat Dec 28, 2019 12:38 pm

Roarindino wrote:
Sat Dec 28, 2019 12:32 pm
Jags4186 wrote:
Sat Dec 28, 2019 11:59 am
What does inflation have to do with anything?

$615k is more than $431k
Inflation is important! It affects your buying power. $500k today is a lot less than what is was worth 30 years ago. A rough calculation for inflation is every 30 years the value of your money is half what it was. So in 10 years $400k is about the same value as $600k 10 years later.
In this example our twins have $615k and $431k each at the same time. We don’t need to adjust those numbers for inflation to know that the early saver has more money.

rascott
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Re: Investing at an early age vs late theory

Post by rascott » Sat Dec 28, 2019 12:39 pm

I understand what your point is about inflation....
all you would need to do is inflation-adjust the nominal contribution amounts.

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Re: Investing at an early age vs late theory

Post by rascott » Sat Dec 28, 2019 12:40 pm

HawkeyePierce wrote:
Sat Dec 28, 2019 12:38 pm
Roarindino wrote:
Sat Dec 28, 2019 12:32 pm
Jags4186 wrote:
Sat Dec 28, 2019 11:59 am
What does inflation have to do with anything?

$615k is more than $431k
Inflation is important! It affects your buying power. $500k today is a lot less than what is was worth 30 years ago. A rough calculation for inflation is every 30 years the value of your money is half what it was. So in 10 years $400k is about the same value as $600k 10 years later.
In this example our twins have $615k and $431k each at the same time. We don’t need to adjust those numbers for inflation to know that the early saver has more money.

The point is that a $5k contribution 30 years ago was a much bigger real contribution than a $5k contribution today.

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Re: Investing at an early age vs late theory

Post by arcticpineapplecorp. » Sat Dec 28, 2019 12:42 pm

Roarindino wrote:
Sat Dec 28, 2019 12:32 pm
Inflation is important! It affects your buying power. $500k today is a lot less than what is was worth 30 years ago. A rough calculation for inflation is every 30 years the value of your money is half what it was. So in 10 years $400k is about the same value as $600k 10 years later.
ok, i get what you're saying but unless we're talking about a high or hyperinflation scenario then wouldn't you agree it's wiser to invest:

$55k instead of $130k and wind up with $615,580 rather than $431,754?

1. You will have invested $75,000 less but end up with $183,826 more.

Do you see any scenario where it wouldn't have been worth it?

2. Also, this example has the person stop investing at 35. It's doing that to illustrate a point, not to encourage anyone to stop saving.

3. can you figure out (with a future value calculation on a spreadsheet) how much MORE the one who started at 25 would have if s/he kept investing $5000 (and earning 8% per year) if continued until age 60 like the second person in the example?

starting early is the lesson. Work smarter, not harder. The earlier you start the easier it is. The later you start, the harder it is.

4. You could also run the numbers a different way and determine how much LESS the person starting at 25 would need to invest in order to wind up with what person two did by age 60. The answer is person one could invest FAR less than $130,000 to wind up with $431,754 by staring 10 years earlier than person 2.

if you're not sure how to run those numbers in the two problem sets I've suggested for you to solve (in #3 and #4 above), let us know.
Last edited by arcticpineapplecorp. on Sat Dec 28, 2019 12:46 pm, edited 2 times in total.
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alluringreality
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Re: Investing at an early age vs late theory

Post by alluringreality » Sat Dec 28, 2019 12:45 pm

The chart presumes a yearly 8% return. For that sort of return, at this time, you will need to invest primarily in stocks. The information is a simplification, since a constant 8% return is not exactly how stocks work. If the stock market happens to fall and have no gain over a decade, like happened in the 2000s, the person on the left can't expect to gain 8% each year during that sort of time period from age 36 with current projected returns. I agree that it MAY pay to invest early, but realistically when you invest in stocks there are lots of possible outcomes.

The scenario on the left does not guarantee a higher bottom line, since the actual amount will depend on the market. If you have a decade that includes bear markets, like the 2000s, then the person on the right is probably in better shape, because they will be buying into the lower prices. I think it makes more sense to show the person on the left investing half the amount ($2500) each year. The resulting conclusions would be similar, with the person on the left investing less money and likely to have a higher balance, but it would simply dollar cost average across the entire timeline similar to the person on the right.
rascott wrote:
Sat Dec 28, 2019 12:40 pm
The point is that a $5k contribution 30 years ago was a much bigger real contribution than a $5k contribution today.
The example on the left and right only start 10 years apart. Inflation over a decade is generally expected to be far less than compound returns over a decade. For example the US inflation calculator lists a 2009 dollar being worth $1.20 of a 2019 dollar.
Last edited by alluringreality on Sat Dec 28, 2019 12:51 pm, edited 1 time in total.
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Re: Investing at an early age vs late theory

Post by mbasherp » Sat Dec 28, 2019 12:45 pm

The table you are referencing is all nominal dollars. The investment returns include annual inflation and you can compare the two ending amounts apples to apples.

You are correct that 5k each year is a varying amount of real dollars. You could add another column which applies an inflation adjustment to each years contributions (similar to when you view your social security earnings record) and total them again in 2020 dollars. The early saver will still have more real dollars after contributing less, but yes, the difference will be smaller.

I don’t think that debunks this argument, it just keeps it simple because most average people can’t wrap their heads around inflation and ignoring it doesn’t void the conclusion anyway.

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Roarindino
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Re: Investing at an early age vs late theory

Post by Roarindino » Sat Dec 28, 2019 1:09 pm

mbasherp wrote:
Sat Dec 28, 2019 12:45 pm
The table you are referencing is all nominal dollars. The investment returns include annual inflation and you can compare the two ending amounts apples to apples.

You are correct that 5k each year is a varying amount of real dollars. You could add another column which applies an inflation adjustment to each years contributions (similar to when you view your social security earnings record) and total them again in 2020 dollars. The early saver will still have more real dollars after contributing less, but yes, the difference will be smaller.

I don’t think that debunks this argument, it just keeps it simple because most average people can’t wrap their heads around inflation and ignoring it doesn’t void the conclusion anyway.
I agree with you. The real difference is smaller and you would have to weigh the cost benefits to lifestyle when trying to save a larger amount while in your 20s when most people are not making as much as they would in their 30s or 40s. But I am just over analyzing a simple example to show people that saving early is better.

alluringreality
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Re: Investing at an early age vs late theory

Post by alluringreality » Sat Dec 28, 2019 1:43 pm

Roarindino wrote:
Sat Dec 28, 2019 1:09 pm
I am just over analyzing a simple example to show people that saving early is better.
Generally investing early is probably going to be a better choice. The reason I consider the chart questionable relates to living through the 2000s, where someone that had a lump-sum in the stock market going into the decade probably didn't make 8% if they added no money for 10 years. Of course there are other examples where having a lump-sum invested would have turned out to be a highly questionable idea over a decade, like Japan for a couple decades after 1990. If someone truly believes the idea as presented in the representation on the left it might make sense to buy as much stock as possible on credit as early as possible, but that's not how the world actually works and might end up being a rather questionable approach.
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Re: Investing at an early age vs late theory

Post by H-Town » Sat Dec 28, 2019 1:44 pm

Roarindino wrote:
Sat Dec 28, 2019 11:52 am
Image
A different way to look at this is using Rule of 72: with 8% return, your money will double every 9 years. At 35 year old, twin #1 already have $89,886 and stop contributing. It takes twin #2 until 45 year old to accumulate $89,886. Although twin #1 stops contributing, twin #1 will have 10 years of compounding interest to at least double the $89,886 and then some.

Saving early and often is the key to build great wealth. Don't buy new car, don't buy a house right after you got your job. If you can delay gratification until 35-40, you already saved a meaningful amount of money to feed to the compounding interest machine.

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Re: Investing at an early age vs late theory

Post by Schlabba » Sat Dec 28, 2019 1:49 pm

H-Town wrote:
Sat Dec 28, 2019 1:44 pm
Roarindino wrote:
Sat Dec 28, 2019 11:52 am
Image
A different way to look at this is using Rule of 72: with 8% return, your money will double every 9 years. At 35 year old, twin #1 already have $89,886 and stop contributing. It takes twin #2 until 45 year old to accumulate $89,886. Although twin #1 stops contributing, twin #1 will have 10 years of compounding interest to at least double the $89,886 and then some.

Saving early and often is the key to build great wealth. Don't buy new car, don't buy a house right after you got your job. If you can delay gratification until 35-40, you already saved a meaningful amount of money to feed to the compounding interest machine.
8% of 89886 is higher than 5000 so you can see from that point on winner-twin will beat loser-twin.
Secretly a dividend investor. Feel free to ask why.

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Steve Reading
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Re: Investing at an early age vs late theory

Post by Steve Reading » Sat Dec 28, 2019 1:52 pm

Roarindino wrote:
Sat Dec 28, 2019 11:52 am
Image


I’ve seen many charts about how investing early from age 25-35 will wind up with more than someone who invests the same amount a year from 35-60. Is this entirely true given inflation?

For the above example chart, 25 year old the person has invested the money for 10 more years than the 35 year old. Plus that $600k with inflation is approximately worth $400k 10 years ago when the 35 year old turned 60. But I suppose the real benefit is the 25 year old only invested money for 10 years compared to 25 years for the other person. But the 25 year old also had to keep the money invested for an extra 10 years.

What do you think? I’m all for saving early but this argument never made sense to me. I suppose it is an oversimplification to convince people to start saving early.
Idk why you’re complicating it with inflation. Assume inflation is 2% and just work with real numbers instead. Assume a 6% real return and re-do your numbers. Then compare the amounts. Then you don’t have to worry about the fact that 5k when you’re 25 is worth more than 5k when you’re 35. You also won’t have to account for inflation-adjusting the ending totals either.

You’ll find that the real return you can earn REALLY matters in this scenario. Which isn’t surprising.

alluringreality
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Re: Investing at an early age vs late theory

Post by alluringreality » Sat Dec 28, 2019 2:04 pm

H-Town wrote:
Sat Dec 28, 2019 1:44 pm
using Rule of 72: with 8% return, your money will double every 9 years.
Schlabba wrote:
Sat Dec 28, 2019 1:49 pm
8% of 89886 is higher than 5000 so you can see from that point on winner-twin will beat loser-twin.
These ideas mainly apply to fairy-tale spreadsheet land where lump-sum contributions are guaranteed to earn 8%. In the real world US treasury rates are less than half that amount, and it's possible to have a flat decade with money previously-invested in stocks or other assets targeted to return 8%.
Targets: 15% I Bonds, 15% EE Bonds, 45% US Stock (Mid & Small Tilt), 25% Ex-US Stock (Small Tilt)

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Re: Investing at an early age vs late theory

Post by Jags4186 » Sat Dec 28, 2019 2:17 pm

Roarindino wrote:
Sat Dec 28, 2019 12:32 pm
Jags4186 wrote:
Sat Dec 28, 2019 11:59 am
What does inflation have to do with anything?

$615k is more than $431k
Inflation is important! It affects your buying power. $500k today is a lot less than what is was worth 30 years ago. A rough calculation for inflation is every 30 years the value of your money is half what it was. So in 10 years $400k is about the same value as $600k 10 years later.
Inflation is only important when comparing different dates and purchasing power. In any given year, $615,000 has more purchasing power than $431,000.

In your hypothetical example, the person on the left always has more money than the person on the right. Of course, if the person on the right was born in 1850 and the person on the left was born in 1950, then yes, in that scenario, the person on the right has more purchasing power in 1910 than the other guy in 2010. He still has less money though.

This example is used as a tool for you, personally, to see the effects of compounding. It's better for you to start saving early than it is to start saving later.

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Roarindino
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Re: Investing at an early age vs late theory

Post by Roarindino » Sat Dec 28, 2019 2:36 pm

Jags4186 wrote:
Sat Dec 28, 2019 2:17 pm
Roarindino wrote:
Sat Dec 28, 2019 12:32 pm
Jags4186 wrote:
Sat Dec 28, 2019 11:59 am
What does inflation have to do with anything?

$615k is more than $431k
Inflation is important! It affects your buying power. $500k today is a lot less than what is was worth 30 years ago. A rough calculation for inflation is every 30 years the value of your money is half what it was. So in 10 years $400k is about the same value as $600k 10 years later.
Inflation is only important when comparing different dates and purchasing power. In any given year, $615,000 has more purchasing power than $431,000.

In your hypothetical example, the person on the left always has more money than the person on the right. Of course, if the person on the right was born in 1850 and the person on the left was born in 1950, then yes, in that scenario, the person on the right has more purchasing power in 1910 than the other guy in 2010. He still has less money though.

This example is used as a tool for you, personally, to see the effects of compounding. It's better for you to start saving early than it is to start saving later.
25-60 years in age is a 35 year span
35-60 years in age is a 25 year span

Whether the scenario is about twins or they’re born 10 years apart you still have to account for the inflation during 10 years either in the beginning for twins or at the end for non twins.

Jags4186
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Re: Investing at an early age vs late theory

Post by Jags4186 » Sat Dec 28, 2019 2:46 pm

Roarindino wrote:
Sat Dec 28, 2019 2:36 pm
Jags4186 wrote:
Sat Dec 28, 2019 2:17 pm
Roarindino wrote:
Sat Dec 28, 2019 12:32 pm
Jags4186 wrote:
Sat Dec 28, 2019 11:59 am
What does inflation have to do with anything?

$615k is more than $431k
Inflation is important! It affects your buying power. $500k today is a lot less than what is was worth 30 years ago. A rough calculation for inflation is every 30 years the value of your money is half what it was. So in 10 years $400k is about the same value as $600k 10 years later.
Inflation is only important when comparing different dates and purchasing power. In any given year, $615,000 has more purchasing power than $431,000.

In your hypothetical example, the person on the left always has more money than the person on the right. Of course, if the person on the right was born in 1850 and the person on the left was born in 1950, then yes, in that scenario, the person on the right has more purchasing power in 1910 than the other guy in 2010. He still has less money though.

This example is used as a tool for you, personally, to see the effects of compounding. It's better for you to start saving early than it is to start saving later.
25-60 years in age is a 35 year span
35-60 years in age is a 25 year span

Whether the scenario is about twins or they’re born 10 years apart you still have to account for the inflation during 10 years either in the beginning for twins or at the end for non twins.
You have two people, Andy and Bob, today both 25 years old.

Andy starts investing $5000/yr in 2020 through 2029.
Bob starts investing $5000/yr in 2030 through 2054.
They earn identical 8% returns every year.
Andy ends up with $615,000
Bob ends up with $431,000

If your argument is that Andy's $5000 invested in 2020 is inflation-adjusted more than Bob's $5000 invested in 2054, then yes that is correct. That doesn't change the outcome though. Andy has $615,000 in 2054 and Bob has $431,000 in 2054.

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Re: Investing at an early age vs late theory

Post by H-Town » Sat Dec 28, 2019 2:50 pm

alluringreality wrote:
Sat Dec 28, 2019 2:04 pm
H-Town wrote:
Sat Dec 28, 2019 1:44 pm
using Rule of 72: with 8% return, your money will double every 9 years.
Schlabba wrote:
Sat Dec 28, 2019 1:49 pm
8% of 89886 is higher than 5000 so you can see from that point on winner-twin will beat loser-twin.
These ideas mainly apply to fairy-tale spreadsheet land where lump-sum contributions are guaranteed to earn 8%. In the real world US treasury rates are less than half that amount, and it's possible to have a flat decade with money previously-invested in stocks or other assets targeted to return 8%.
Wanna call Dave Ramsey and tell him that? Take one for the team.

I’m using 0% real growth for my last updated projection for my early retirement. Should I go lower? My main enemy right now is inflation. Back then people can retire with $1M. Nowadays, it starts from $4M.

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Mullins
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Re: Investing at an early age vs late theory

Post by Mullins » Sat Dec 28, 2019 2:55 pm

My simple brain merely reasons, "well, if I were 25 and accumulated investments, and then let that ride 25 years, I think I'd end up with more money than if I simply only started in the last 25 years." So, yes, the younger the better because of the element of longer time available in which (we hope) to do its job.

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Roarindino
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Re: Investing at an early age vs late theory

Post by Roarindino » Sat Dec 28, 2019 3:00 pm

Jags4186 wrote:
Sat Dec 28, 2019 2:46 pm
Roarindino wrote:
Sat Dec 28, 2019 2:36 pm
Jags4186 wrote:
Sat Dec 28, 2019 2:17 pm
Roarindino wrote:
Sat Dec 28, 2019 12:32 pm
Jags4186 wrote:
Sat Dec 28, 2019 11:59 am
What does inflation have to do with anything?

$615k is more than $431k
Inflation is important! It affects your buying power. $500k today is a lot less than what is was worth 30 years ago. A rough calculation for inflation is every 30 years the value of your money is half what it was. So in 10 years $400k is about the same value as $600k 10 years later.
Inflation is only important when comparing different dates and purchasing power. In any given year, $615,000 has more purchasing power than $431,000.

In your hypothetical example, the person on the left always has more money than the person on the right. Of course, if the person on the right was born in 1850 and the person on the left was born in 1950, then yes, in that scenario, the person on the right has more purchasing power in 1910 than the other guy in 2010. He still has less money though.

This example is used as a tool for you, personally, to see the effects of compounding. It's better for you to start saving early than it is to start saving later.
25-60 years in age is a 35 year span
35-60 years in age is a 25 year span

Whether the scenario is about twins or they’re born 10 years apart you still have to account for the inflation during 10 years either in the beginning for twins or at the end for non twins.
You have two people, Andy and Bob, today both 25 years old.

Andy starts investing $5000/yr in 2020 through 2029.
Bob starts investing $5000/yr in 2030 through 2054.
They earn identical 8% returns every year.
Andy ends up with $615,000
Bob ends up with $431,000

If your argument is that Andy's $5000 invested in 2020 is inflation-adjusted more than Bob's $5000 invested in 2054, then yes that is correct. That doesn't change the outcome though. Andy has $615,000 in 2054 and Bob has $431,000 in 2054.
Exactly. And I was just wondering what the true cost of investing is for Andy vs Bob when you account for inflation.

How much more did it actually cost Bob after you take into account inflation? Yes Bob in the end has less money because he starting saving later but maybe he didn’t invest that much more than Andy as this example would have you believe if you take into account inflation. But this is just a simple scenario to teach the point that starting to save early is a good idea.

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Re: Investing at an early age vs late theory

Post by Schlabba » Sat Dec 28, 2019 3:04 pm

H-Town wrote:
Sat Dec 28, 2019 2:50 pm
alluringreality wrote:
Sat Dec 28, 2019 2:04 pm
H-Town wrote:
Sat Dec 28, 2019 1:44 pm
using Rule of 72: with 8% return, your money will double every 9 years.
Schlabba wrote:
Sat Dec 28, 2019 1:49 pm
8% of 89886 is higher than 5000 so you can see from that point on winner-twin will beat loser-twin.
These ideas mainly apply to fairy-tale spreadsheet land where lump-sum contributions are guaranteed to earn 8%. In the real world US treasury rates are less than half that amount, and it's possible to have a flat decade with money previously-invested in stocks or other assets targeted to return 8%.
Wanna call Dave Ramsey and tell him that? Take one for the team.

I’m using 0% real growth for my last updated projection for my early retirement. Should I go lower? My main enemy right now is inflation. Back then people can retire with $1M. Nowadays, it starts from $4M.
Dave Ramsey uses 14% I believe?

Anyway to "fairy-tale spreadsheet", it can also be the other way around. The moment winner-twin finishes investing the shares skyrocket while loser-twin is just starting to get in the market with 5000.
Secretly a dividend investor. Feel free to ask why.

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Re: Investing at an early age vs late theory

Post by Jags4186 » Sat Dec 28, 2019 3:13 pm

Roarindino wrote:
Sat Dec 28, 2019 3:00 pm

Exactly. And I was just wondering what the true cost of investing is for Andy vs Bob when you account for inflation.

How much more did it actually cost Bob after you take into account inflation? Yes Bob in the end has less money because he starting saving later but maybe he didn’t invest that much more than Andy as this example would have you believe if you take into account inflation. But this is just a simple scenario to teach the point that starting to save early is a good idea.
That's easy enough to figure out. Let's assume 3% inflation annually.

Andy invests $5000 in year 1
By year 10, if Andy is still investing $5000 nominally, he is investing $3801 in "Year 1 dollars"
Bob invests $5000 in year 11. This is $3687 in "Year 1 dollars"
By year 35 Bob invests $5000 nominal which is $1721 "Year 1 dollars"

Andy invested a total of $43,762 "Year 1 dollars"
Bob invested a total of $67,262 "Year 1 dollars"

Bob invests 54% more "Year 1 dollars" to get 30% less "Year 35 dollars"

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Roarindino
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Re: Investing at an early age vs late theory

Post by Roarindino » Sat Dec 28, 2019 3:18 pm

Jags4186 wrote:
Sat Dec 28, 2019 3:13 pm
Roarindino wrote:
Sat Dec 28, 2019 3:00 pm

Exactly. And I was just wondering what the true cost of investing is for Andy vs Bob when you account for inflation.

How much more did it actually cost Bob after you take into account inflation? Yes Bob in the end has less money because he starting saving later but maybe he didn’t invest that much more than Andy as this example would have you believe if you take into account inflation. But this is just a simple scenario to teach the point that starting to save early is a good idea.
That's easy enough to figure out. Let's assume 3% inflation annually.

Andy invests $5000 in year 1
By year 10, if Andy is still investing $5000 nominally, he is investing $3801 in "Year 1 dollars"
Bob invests $5000 in year 11. This is $3687 in "Year 1 dollars"
By year 35 Bob invests $5000 nominal which is $1721 "Year 1 dollars"

Andy invested a total of $43,762 "Year 1 dollars"
Bob invested a total of $67,262 "Year 1 dollars"

Bob invests 54% more "Year 1 dollars" to get 30% less "Year 35 dollars"
Thank you.

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Re: Investing at an early age vs late theory

Post by Watty » Sat Dec 28, 2019 3:31 pm

One thing to keep in mind is that even if they both plan on retiring at 60 that might not happen.

I was lucky but I have seen a lot more people than I would have expected run into things like health or career problems like layoffs, especially in their 50s, that caused major problems with their retirement plans.

If something happened like the early saver was laid off when they were 55 then they could still do just fine even if they had to take a much lower paying job because that was all they could get. If the late saver was laid off when they were 55 then they could end up real short of retirement funds.

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Re: Investing at an early age vs late theory

Post by TNWoods » Sat Dec 28, 2019 3:31 pm

Ok, I made a spreadsheet where Andy invested $5000 when he was 25, and then the next year he invested 2% more, $5100. He did that for 10 years, stopping contributions at age 34.

Then Bob started investing at age 35, and his first year investing was $6094.97, equal to 2% more than Andy's last contribution. Bob continued from age 35 through 65.

So since each year's contribution is 2% more than the previous year's we now can compare the totals without worrying about inflation. The value of Andy's $5000 is now compared to Bob's contribution of $6094.97 instead.

Andy invested $54,748.60
Bob invested $258,301.51

Andy has $919,336.93
Bob has $989,588.52

So their final totals are very close, with Bob a bit ahead, but Andy only invested about 1/5th of what Bob invested.

Or did I screw up my math or logic?

TNWoods

<edit>
Jags above did similar calculations, except reducing each year to match the original $5000. I increased each year by an assumed 2% inflation. I think that more acurately reflects what an investor would be doing, and the end result is much more dramatic.
</edit>

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Re: Investing at an early age vs late theory

Post by Jags4186 » Sat Dec 28, 2019 3:47 pm

TNWoods wrote:
Sat Dec 28, 2019 3:31 pm
Ok, I made a spreadsheet where Andy invested $5000 when he was 25, and then the next year he invested 2% more, $5100. He did that for 10 years, stopping contributions at age 34.

Then Bob started investing at age 35, and his first year investing was $6094.97, equal to 2% more than Andy's last contribution. Bob continued from age 35 through 65.

So since each year's contribution is 2% more than the previous year's we now can compare the totals without worrying about inflation. The value of Andy's $5000 is now compared to Bob's contribution of $6094.97 instead.

Andy invested $54,748.60
Bob invested $258,301.51

Andy has $919,336.93
Bob has $989,588.52

So their final totals are very close, with Bob a bit ahead, but Andy only invested about 1/5th of what Bob invested.

Or did I screw up my math or logic?

TNWoods

<edit>
Jags above did similar calculations, except reducing each year to match the original $5000. I increased each year by an assumed 2% inflation. I think that more acurately reflects what an investor would be doing, and the end result is much more dramatic.
</edit>
Yes, I initially did the same exercise as you, but I don't think that's what the OP was asking. He was looking to see the effects of the diminished real value of investing $5000 nominally year after year.

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Re: Investing at an early age vs late theory

Post by willthrill81 » Sat Dec 28, 2019 3:53 pm

To be honest, this sounds like a poor argument to delay saving.

Invest early and often. I have learned this the hard way. Had we started saving in earnest when we should have, then I would be able to retire several years earlier than I probably will.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Investing at an early age vs late theory

Post by Sam1 » Sat Dec 28, 2019 3:56 pm

I agree with what you’re saying.

I didn’t save enough early on in my career. I took a lot of vacations, lived in (too nice of) apartments, enjoyed overpriced drinks, wore expensive clothes etc. I wouldn’t take it back.

Now I earn plenty of money and can sock away hundreds of thousands a year. I’m sure I’d regret my early financial habits a lot more if I weren’t making the money I am today.

A similar concept is how there is so much focus on saving/investing leading up to retirement but not nearly as much on how much you can save by delaying retirement. Delaying retirement by one year isn’t just one year more of saving but it’s also one more year NOT taking money out of savings/investments.

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Re: Investing at an early age vs late theory

Post by Jags4186 » Sat Dec 28, 2019 3:58 pm

Sam1 wrote:
Sat Dec 28, 2019 3:56 pm
I agree with what you’re saying.

I didn’t save enough early on in my career. I took a lot of vacations, lived in (too nice of) apartments, enjoyed overpriced drinks, wore expensive clothes etc. I wouldn’t take it back.

Now I earn plenty of money and can sock away hundreds of thousands a year. I’m sure I’d regret my early financial habits a lot more if I weren’t making the money I am today.

A similar concept is how there is so much focus on saving/investing leading up to retirement but not nearly as much on how much you can save by delaying retirement. Delaying retirement by one year isn’t just one year more of saving but it’s also one more year NOT taking money out of savings/investments.
And one more year of working. Blech.

An incredibly small amount of people are able to "sock away hundreds of thousands a year." While I appreciate everything worked out well for you, that type of reasoning will not work for the overwhelming majority.

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Re: Investing at an early age vs late theory

Post by willthrill81 » Sat Dec 28, 2019 3:59 pm

Jags4186 wrote:
Sat Dec 28, 2019 3:58 pm
Sam1 wrote:
Sat Dec 28, 2019 3:56 pm
I agree with what you’re saying.

I didn’t save enough early on in my career. I took a lot of vacations, lived in (too nice of) apartments, enjoyed overpriced drinks, wore expensive clothes etc. I wouldn’t take it back.

Now I earn plenty of money and can sock away hundreds of thousands a year. I’m sure I’d regret my early financial habits a lot more if I weren’t making the money I am today.

A similar concept is how there is so much focus on saving/investing leading up to retirement but not nearly as much on how much you can save by delaying retirement. Delaying retirement by one year isn’t just one year more of saving but it’s also one more year NOT taking money out of savings/investments.
And one more year of working. Blech.
While I generally like my job, I'm inclined to agree.

I wonder whether many of the 'OMY' crowd have a good grasp of the life expectancy tables. A 65 year old American male has a 20% chance of never seeing his 74th birthday.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Investing at an early age vs late theory

Post by Sam1 » Sat Dec 28, 2019 4:00 pm

willthrill81 wrote:
Sat Dec 28, 2019 3:53 pm
To be honest, this sounds like a poor argument to delay saving.

Invest early and often. I have learned this the hard way. Had we started saving in earnest when we should have, then I would be able to retire several years earlier than I probably will.
Have you really done the math though?

When I graduated college I made 40k. At most I could have saved let’s say, 20k. That 20k would have hurt to save. No vacations, all used clothing etc. I would have had to live off around $1.5k a month, including rent, to save $20k that year.

Now I have a HHI of close to 500k. We can easily save 200k. I don’t have to not go on vacation or only wear used clothing. I still have 20+ years to retirement.

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Re: Investing at an early age vs late theory

Post by Sam1 » Sat Dec 28, 2019 4:03 pm

willthrill81 wrote:
Sat Dec 28, 2019 3:59 pm
Jags4186 wrote:
Sat Dec 28, 2019 3:58 pm
Sam1 wrote:
Sat Dec 28, 2019 3:56 pm
I agree with what you’re saying.

I didn’t save enough early on in my career. I took a lot of vacations, lived in (too nice of) apartments, enjoyed overpriced drinks, wore expensive clothes etc. I wouldn’t take it back.

Now I earn plenty of money and can sock away hundreds of thousands a year. I’m sure I’d regret my early financial habits a lot more if I weren’t making the money I am today.

A similar concept is how there is so much focus on saving/investing leading up to retirement but not nearly as much on how much you can save by delaying retirement. Delaying retirement by one year isn’t just one year more of saving but it’s also one more year NOT taking money out of savings/investments.
And one more year of working. Blech.
While I generally like my job, I'm inclined to agree.

I wonder whether many of the 'OMY' crowd have a good grasp of the life expectancy tables. A 65 year old American male has a 20% chance of never seeing his 74th birthday.
Most American males are overweight and out of shape. What’s the statistic for a college educated, not overweight American male?

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Re: Investing at an early age vs late theory

Post by GerryL » Sat Dec 28, 2019 4:03 pm

Roarindino wrote:
Sat Dec 28, 2019 11:52 am

I’ve seen many charts about how investing early from age 25-35 will wind up with more than someone who invests the same amount a year from 35-60. Is this entirely true given inflation?

For the above example chart, 25 year old the person has invested the money for 10 more years than the 35 year old. Plus that $600k with inflation is approximately worth $400k 10 years ago when the 35 year old turned 60. But I suppose the real benefit is the 25 year old only invested money for 10 years compared to 25 years for the other person. But the 25 year old also had to keep the money invested for an extra 10 years.

What do you think? I’m all for saving early but this argument never made sense to me. I suppose it is an oversimplification to convince people to start saving early.
First, it's not "a theory." It's math.
Second, and this is the theory part, someone who starts investing at age 25 is probably not going to stop 10 years later. And so yes, it is a simplified illustration to get people to get into a savings habit.

This data is used in the module on the fundamentals of investing that I deliver in high school classes, but it is presented in the form of a vertical bar chart. I tell the kids that the bar for the lifelong saver would shoot way off the top of the page.

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Re: Investing at an early age vs late theory

Post by TNWoods » Sat Dec 28, 2019 4:05 pm

willthrill81 wrote:
Sat Dec 28, 2019 3:53 pm
To be honest, this sounds like a poor argument to delay saving.

Invest early and often. I have learned this the hard way. Had we started saving in earnest when we should have, then I would be able to retire several years earlier than I probably will.
But it's not an argument to delay saving at all, it's the opposite. It's an argument to start saving early. It points out that that even if you leave off the "and often" part of "Invest early and often", you're better off because you didn't delay.

TNWoods

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Re: Investing at an early age vs late theory

Post by H-Town » Sat Dec 28, 2019 4:05 pm

willthrill81 wrote:
Sat Dec 28, 2019 3:59 pm

While I generally like my job, I'm inclined to agree.

I wonder whether many of the 'OMY' crowd have a good grasp of the life expectancy tables. A 65 year old American male has a 20% chance of never seeing his 74th birthday.
To be honest, I count each day that I’m alive as a blessing. I could die tomorrow and no statistics can stop it. Murphy’s law: anything that can happen, will happen. That’s my approach at life. With that being said, I’m still planning for the future and be responsible financially because I don’t want to be a burden to my family or society. I would rather provide for my family and give it back to society.
Last edited by H-Town on Sat Dec 28, 2019 4:06 pm, edited 2 times in total.

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Re: Investing at an early age vs late theory

Post by Sam1 » Sat Dec 28, 2019 4:06 pm

Jags4186 wrote:
Sat Dec 28, 2019 3:58 pm
Sam1 wrote:
Sat Dec 28, 2019 3:56 pm
I agree with what you’re saying.

I didn’t save enough early on in my career. I took a lot of vacations, lived in (too nice of) apartments, enjoyed overpriced drinks, wore expensive clothes etc. I wouldn’t take it back.

Now I earn plenty of money and can sock away hundreds of thousands a year. I’m sure I’d regret my early financial habits a lot more if I weren’t making the money I am today.

A similar concept is how there is so much focus on saving/investing leading up to retirement but not nearly as much on how much you can save by delaying retirement. Delaying retirement by one year isn’t just one year more of saving but it’s also one more year NOT taking money out of savings/investments.
And one more year of working. Blech.

An incredibly small amount of people are able to "sock away hundreds of thousands a year." While I appreciate everything worked out well for you, that type of reasoning will not work for the overwhelming majority.
It’s true we are high earners. But I have always believed that how much you make is just as important as how much you save. I always sought out to earn a lot of money. It makes it so much easier to save large sums.

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Re: Investing at an early age vs late theory

Post by willthrill81 » Sat Dec 28, 2019 4:07 pm

Sam1 wrote:
Sat Dec 28, 2019 4:00 pm
willthrill81 wrote:
Sat Dec 28, 2019 3:53 pm
To be honest, this sounds like a poor argument to delay saving.

Invest early and often. I have learned this the hard way. Had we started saving in earnest when we should have, then I would be able to retire several years earlier than I probably will.
Have you really done the math though?

When I graduated college I made 40k. At most I could have saved let’s say, 20k. That 20k would have hurt to save. No vacations, all used clothing etc. I would have had to live off around $1.5k a month, including rent, to save $20k that year.

Now I have a HHI of close to 500k. We can easily save 200k. I don’t have to not go on vacation or only wear used clothing. I still have 20+ years to retirement.
Yes, I've done the math. $1 invested when you're 25 is like $8 invested when you're 55 (assuming 7% real returns).

It's certainly true that many cannot afford to save much when they are younger, but even when my wife and I lived below the poverty line for several years, we still managed to save around 10% of our net income, so I know what I'm talking about when I say that it can be done. And our total income was less than $1,500/month. We were thrifty, to be sure, but we weren't (and aren't) too proud to shop for clothes at a thrift store, especially if that enables us to save for our future.

Now if it's a situation where your income has grown by a factor of 10 or more, as in your case, then I agree that saving more later makes a lot of sense. But that's the exception for most people.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Investing at an early age vs late theory

Post by Sam1 » Sat Dec 28, 2019 4:11 pm

GerryL wrote:
Sat Dec 28, 2019 4:03 pm
Roarindino wrote:
Sat Dec 28, 2019 11:52 am

I’ve seen many charts about how investing early from age 25-35 will wind up with more than someone who invests the same amount a year from 35-60. Is this entirely true given inflation?

For the above example chart, 25 year old the person has invested the money for 10 more years than the 35 year old. Plus that $600k with inflation is approximately worth $400k 10 years ago when the 35 year old turned 60. But I suppose the real benefit is the 25 year old only invested money for 10 years compared to 25 years for the other person. But the 25 year old also had to keep the money invested for an extra 10 years.

What do you think? I’m all for saving early but this argument never made sense to me. I suppose it is an oversimplification to convince people to start saving early.
First, it's not "a theory." It's math.
Second, and this is the theory part, someone who starts investing at age 25 is probably not going to stop 10 years later. And so yes, it is a simplified illustration to get people to get into a savings habit.

This data is used in the module on the fundamentals of investing that I deliver in high school classes, but it is presented in the form of a vertical bar chart. I tell the kids that the bar for the lifelong saver would shoot way off the top of the page.
It’s math that can be a little misleading. It’s way easier to save $5k at age 50 than at age 20.

It’s also math that is more relevant to lower or middle class wage earners. Do you think someone who is a big law attorney earning $750k should be concerned he or she wasn’t maxing out a 401k at age 24? I think not.

If you’re concerned about your financial future and want to grow wealth, then investing in your career/future wages early on is way more important than saving nominal amounts of money in your 20s.

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Re: Investing at an early age vs late theory

Post by willthrill81 » Sat Dec 28, 2019 4:14 pm

Sam1 wrote:
Sat Dec 28, 2019 4:03 pm
willthrill81 wrote:
Sat Dec 28, 2019 3:59 pm
Jags4186 wrote:
Sat Dec 28, 2019 3:58 pm
Sam1 wrote:
Sat Dec 28, 2019 3:56 pm
I agree with what you’re saying.

I didn’t save enough early on in my career. I took a lot of vacations, lived in (too nice of) apartments, enjoyed overpriced drinks, wore expensive clothes etc. I wouldn’t take it back.

Now I earn plenty of money and can sock away hundreds of thousands a year. I’m sure I’d regret my early financial habits a lot more if I weren’t making the money I am today.

A similar concept is how there is so much focus on saving/investing leading up to retirement but not nearly as much on how much you can save by delaying retirement. Delaying retirement by one year isn’t just one year more of saving but it’s also one more year NOT taking money out of savings/investments.
And one more year of working. Blech.
While I generally like my job, I'm inclined to agree.

I wonder whether many of the 'OMY' crowd have a good grasp of the life expectancy tables. A 65 year old American male has a 20% chance of never seeing his 74th birthday.
Most American males are overweight and out of shape. What’s the statistic for a college educated, not overweight American male?
I'm not sure because many variables are involved, and it's hard to get unbiased data. Many of the longevity calculators out there are sponsored by those selling annuities, and they are biased toward overestimating longevity so as to make their product look more attractive.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Investing at an early age vs late theory

Post by Brianmcg321 » Sat Dec 28, 2019 5:04 pm

But which one paid their house off first?
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Re: Investing at an early age vs late theory

Post by alluringreality » Sat Dec 28, 2019 5:43 pm

H-Town wrote:
Sat Dec 28, 2019 2:50 pm
alluringreality wrote:
Sat Dec 28, 2019 2:04 pm
H-Town wrote:
Sat Dec 28, 2019 1:44 pm
using Rule of 72: with 8% return, your money will double every 9 years.
Schlabba wrote:
Sat Dec 28, 2019 1:49 pm
8% of 89886 is higher than 5000 so you can see from that point on winner-twin will beat loser-twin.
These ideas mainly apply to fairy-tale spreadsheet land where lump-sum contributions are guaranteed to earn 8%. In the real world US treasury rates are less than half that amount, and it's possible to have a flat decade with money previously-invested in stocks or other assets targeted to return 8%.
Wanna call Dave Ramsey and tell him that? Take one for the team.
Can't say I've listened to him much, it didn't seem entertaining or nuanced. I do find it interesting how recent forum chatter tends to differ from the following link. At this point there would have been a lot of options over the last 5.5 years to be on pace to double, including just holding the S&P 500, yet that doesn't seem the main direction the link took.
viewtopic.php?f=10&t=138158
Schlabba wrote:
Sat Dec 28, 2019 3:04 pm
it can also be the other way around. The moment winner-twin finishes investing the shares skyrocket while loser-twin is just starting to get in the market with 5000.
I agree that there are certainly merits to investing earlier. I also think there are merits to investing more money over a longer timeframe. Which one of the two scenarios ends up winning out in comparison to each other would depend on the actual timeframe, except when using a predetermined rate of return. Over a majority of timeframes the left side probably wins, although there are also scenarios where the right side might win, when not using a predetermined rate of return.
Targets: 15% I Bonds, 15% EE Bonds, 45% US Stock (Mid & Small Tilt), 25% Ex-US Stock (Small Tilt)

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Re: Investing at an early age vs late theory

Post by macheta » Sun Dec 29, 2019 1:00 pm

Sam1 wrote:
Sat Dec 28, 2019 4:11 pm


It’s math that can be a little misleading. It’s way easier to save $5k at age 50 than at age 20.

It’s also math that is more relevant to lower or middle class wage earners. Do you think someone who is a big law attorney earning $750k should be concerned he or she wasn’t maxing out a 401k at age 24? I think not.

If you’re concerned about your financial future and want to grow wealth, then investing in your career/future wages early on is way more important than saving nominal amounts of money in your 20s.
This makes sense after reading this post. For those of us that were saving 5k per year at age twenty I certainly did not have any problems saving it since it was seamless to me. The money never crossed my paycheck since it went directly into my 401k at age 18. My thought is that you can save early and you can save late in life. What happens if something happens early life? You will have a second attempt later in life. What happens if you plan to save later in life and something happens such as losing a job or getting injured. I always felt good that I have the ability to plan early on an important event. Now, my strategy would change drastically if I was a doctor or lawyer where I had to front load a lot of school debt and time early in life to education.

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Re: Investing at an early age vs late theory

Post by BrtH » Sun Dec 29, 2019 2:35 pm

TNWoods wrote:
Sat Dec 28, 2019 3:31 pm
Ok, I made a spreadsheet where Andy invested $5000 when he was 25, and then the next year he invested 2% more, $5100. He did that for 10 years, stopping contributions at age 34.
In the original image he invests until age 35, not 34. Doesn't really matter for the overall point though.
Then Bob started investing at age 35, and his first year investing was $6094.97, equal to 2% more than Andy's last contribution. Bob continued from age 35 through 65.

So since each year's contribution is 2% more than the previous year's we now can compare the totals without worrying about inflation. The value of Andy's $5000 is now compared to Bob's contribution of $6094.97 instead.

Andy invested $54,748.60
Bob invested $258,301.51

Andy has $919,336.93
Bob has $989,588.52

So their final totals are very close, with Bob a bit ahead, but Andy only invested about 1/5th of what Bob invested.

Or did I screw up my math or logic?
I'd think it's better to adjust the total contributions for inflation as well:

Image

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