How to Retire a Millionaire

I was asked this question recently for an article pitch: When should I start investing for retirement?

Without resorting to talking points and Fidelity Fiduciary wisdom (why did I always love the bankers, even as a child?). I will compare three realistic scenarios here.

No. 1

A: You are a young professional. You have just begun your career at 22. You start investing $10k/year immediately and continue for 20 years until you turn 42. Your kids are in private school, you give up investing and spend the money on their school. 20 years later, you begin pulling from these IRA investments at the age of 62.

B: You are an experienced professional at 42. You began your career at 22. your kids are school age. You want to get serious about investing because you’re serious and finally settled. You start investing $10k/year immediately and continue for 20 years until you turn 62. You begin pulling from these IRA investments at the age of 62.

Assumptions: 8% yearly return (average).

A: $2,303,581.19 (WINNER!)
B: $494,229.21

Retirement fund growth, simple early investment vs. late investment.

The early investor wins by a wide margin. But, the above assumption forgets something critical: Most people can invest more money per year as their salary grows accordingly. Let’s run the same calculation with this new assumption in place.

No.2

New Assumption: 3% raise per year (generous, but you are a high performer). Your contribution will grow at the same rate (10,300, 10,600, 10,900, …). The B scenario will begin at the year 20 contribution rate of $17,535.06.

A: $2,874,163.92 (WINNER!)
B: $1,081,293.72

Retirement fund growth, early investment vs. late investment with raises.

The early investor still wins by a wide margin. Okay, but $10k/year is tough for someone starting their career. So let’s change the assumption one more time.

No. 3

Final Assumption: Early investor contributes $5k/year and the contributions grow at a faster rate: 6% per year (5,300, 5,618, 5955.08, ...). The B scenario will begin at the year 20 contribution rate of $15,128.00.

A: $1,829,574.14 (WINNER!)
B: $1,187,644.37

Retirement fund growth, early investment vs. late investment with lower start.

The early investor wins by a slimmer, but still notable, margin. You can see the late investor closing the gap as the graph progresses. It's unlikely they'll be able to close it without working till 82.


So, what's the value of investing early? Anywhere from $600k to $1.8M and a chance to lower the cost of contributions in your 40s and 50s.

Note: the final contribution in the B case (contribution you would make at age 61) is $45,771.26!. I know very few 61-year-olds who can manage to contribute that to their retirement in one year (a lean year, indeed).

Other Assumptions:

  • Starting to Save at 40, You've missed the luxury train to retirement. What should you do?
  • Buy & Hold, You will never make 8% a year if you ride the emotional market wave.
  • No Major Windfalls, Sale of a company, inheritance, insurance settlement.
  • Non-Failing Investments, At the low point of an investment, even if you hold, companies and projects can still hit the rocks. Have a favorable exit, and diversify.

Should you invest on the front-end or the tail-end of your 40 working years? We run the numbers, and the difference is startling.