There is a pretty simple formula to retiring with millions in the bank, even if you don’t make all that much money.
In a nutshell:
- Get out of debt and stay out of debt
- Save early, and A LOT more than you spend (in more than one basket)
- Protect your assets
- Invest in appreciating assets
- Give your money as much time as possible to grow
Many people that have retirement on their mind are at least doing something to save, whether it be a 401k, a Roth IRA, etc, but almost everyone I talk to fails at two MAJOR things.
They’re only putting aside money in one type of account, and they’re not putting enough money away early in their lives. These two things work together to cause people to work decades more than they need to in order to reach financial independence.
The rationale is “I’ll spend early to have a nice lifestyle, then save later so I can eventually retire.” It’s an easy trap to fall into.
“Maxing Out” a Year Doesn’t Mean You’re Finished Saving
Some people also just don’t understand that there are more ways to save for retirement than just your 401k, or your IRA. Both of those places in the tax code have annual limits, so a lot of people just invest to the limit and stop there, not knowing there are other ways.
They think because they have “maxed out” their account, they have achieved a grand goal and they should spend the rest.
Wrong. You can always build more wealth. If that’s how you’re thinking. You’re doing it backwards.
Make sure you’re thinking about maxing out both IRAs if you’re a working couple, as well as both 401ks if possible. After that, put any side income investments into a SEP IRA, and finally, open brokerage accounts to save after tax money. You can always access this without penalties as well.
It’s incredibly easy to open a brokerage account and invest “after tax” money in things like stock market indexes or bond funds that will experience the same type of growth that your 401k or IRA assets will.
Places like Fidelity, Charles Schwab, eTrade, Capital One Investing, and half a dozen others make this incredibly easy. With any of these, you can be investing within 15 minutes, and there are no limits you’re going to have to worry about hitting with these.
Imagine how quickly you could accumulate future cash if you’re saving upwards of $30,000 – $50,000 a year, or even more? The growth potential of that kind of starting pot is gigantic.
Deferring for a Few Years Now Will Save You Decades Later
If you wait until your late 30s or even your 40s to start saving aggressively, you’re missing out DECADES of ridiculously valuable compounding growth.
Accorinding to the Rule of 72, money doubles about every 7 years. This isn’t some sort of invest magic trick that only a few people know. It’s just math.
This means if you can save $50,000 (or more!) by the end of your 20s by simply delaying the nice house, the nice car, and the nice things you want, by the time you’re 44, it’s going to be worth $200,000, ($50k x 2 x 2) and that’s with nothing else added to it.
In another 7 years at 51, it’ll be worth $400,000, then $800,000 by the time you’re 58, then $1.6 million by the time you’re 65. And again, that’s with nothing else saved on top of that, ever. You’ll have $1.6 million, PLUS whatever else you decide to invest moving forward. That’s the massive power of time.
The Dollars Work for You Now
You can defer gratification for just a few years, and be far more free to do what you want with your income for the rest of your life, because the money and the time will then do the work for you.
At this point, you won’t have to swim uphill. You’re much more free to buy the nice house, the nice car, and the nice toys, because you haven’t sacrified a huge chunk of your future to do it.
That small amount of money you saved on your 20s has funded a massive chunk of your retirement, if not all of it. And you only had to save aggressively for a few years.
On top of this, you’ve also established excellent savings habits as well as cash flow disipline. These things together can help you build incredible wealth over time.
BTW, imagine what those numbers could be if you saved even more to start off? Actually you don’t have to. Use the savings and investment calculator I built for you here to play with the numbers.
Now let’s do the math on the other side of the coin.
Living Large Now Will Cost You Decades Later
Let’s say you spend your 20s and 30s spending all of that nice income you get after landing a grown up job.
- You buy the nice car. Some people even buy a few.
- You buy the nice house. Most people buy way too much.
- You buy all of the cool toys. These end up being worth nothing in a few years.
- You send your kids to private school, which is debatable if it’s actually any better.
All of this, and you feel like you have a pretty sweet life. You’ve made it, right?
Except you haven’t. All you’ve made is a bunch of debt and 25+ years of financial commitment to pay for it. And it’s pretty damn stressful to live that way.
Unless you have an extravagant income ($200,000+, or more in some areas), you’re going to struggle to save anything meaningful, and it’s going to take a long time, which is what really matters.
Maybe you’re savvy with managing debt and cash flow and you max out your IRA for a few years, toss some money in your 401k, and you save $50k by the time you’re 40, which is ten years later than our previous example. Not bad, right?
Let’s see what happens.
By the time you’re 47, you’ve got $100k. When you’re 54, you’ve got $200k. When you’re 61, you’ve got $400k. And when you’re 68, you finally have that $800k.
That’s a full $800,000 less than our previous example – Yes, $800,000, and it even took you 3 years longer to do it. By this point, you probably want to retire and you can’t really save any more, and you don’t have enough money. Hopefully you were able to save more along the way, but if so, it was probably really hard to do.
To hit that $1.6 million from the previous scenario, you’re waiting another 7 years. You’ll be 75 years old and it’ll probably really suck to work that long, if you even live to see it.
Do you really want to work until you’re dead just to have what appears to be a nice lifestyle on the outside? I sure as hell don’t.
And I won’t even go into minimum distributions, but those will also come into account in this scenario. You’ve just waited too long and the tax man wants his money.
What’s My Point?
My point with all of this is, it’s silly to delay your financial freedom and ultimate happiness for decades, or even forever, if all it takes is just a few years of savings and sacrifice to build a lifetime of wealth and freedom. If it’s about the happiness of your family, that’s totally fine, but make sure you’re not just telling yourself that to rationalize your spending.
Even if you’re in a high debt situation now, there’s no reason you can’t get out of it, although it’s going to hurt a lot more because of what you’ve allowed yourself to get used to, but trust me, you’ll be just fine in time.
You can always sell the cars for something more practical. You can always downsize the house for something that allows you to save more money. Yes, it’ll take some work, but you can always change the situation you’re in if you really want to.
So, when should you do it?
The best time to start saving and investing is always now, because you can make more money, but as I’ve learned as I’ve watched my daughter grow up over the last 19 months of my life, you can never get back your time.