Time is money. The phrase is a classic, uttered in America by Benjamin Franklin but with variations going back all the way to the philosopher Antiphon in Classical Greece. But it remains as timeless now as it was then, especially when it comes to financial planning. A recent study out of Edward Jones found that only 1 out of 4 Americans planning to retire have sat down to do retirement planning or even figured out how much money they will need in retirement.
This is understandable. People are busy. Life gets in the way. Retirement planning on the expense side takes time to sit down and make a budget of expenses. Financial planning, too, taking into consideration when to save, how much to save, what to invest those savings in, takes time.
But when it comes to financial planning, time really is money. And it works both ways. The more money there for you at the retirement, the less time you’ll have to spend figuring out how to match your expenses in retirement to your retirement funds.
How is time money in financial planning?
The answer, for those who have been reading this blog for a while, may not be that surprising. It’s a powerful force we like to talk about at Emergent Financial Services. It’s compound interest.
Consider a simple example where savings invested in a diversified portfolio of stocks and bonds gives a return of 6% annually no matter when you start saving. And imagine you are an individual who plans to retire at 72, as an example.
In our first scenario, you start saving at age 22 and you save $6000 a year (the maximum you can put into a Traditional or Roth IRA so it can grow tax-free) for the next 8 years, until age 30. Then you stop saving, and never save another penny.
How much do you have at retirement? Well, thanks to the power of compound interest, that $48,000 in contributions ($6,000 multiplied by 8 years) would have grown to a whopping $751,729 by age 72.
Now let’s imagine a second scenario, where you wait a decade and begin saving at age 32. You follow the same pattern: you save $6000 a year for 8 years until age 40, then stop and never save again.
How much is there at your retirement at age 72? That same $48,000 in total contributions, but started 10 years later, would leave you with $419,762 at retirement.
That’s still a bundle, but it is an incredible $331,967 less than the first scenario. So that 10 year delay had a cost of $331,967 or 44% of the original amount.
And if you wait until age 42? Now you are down to $234,393, another 44% decrease.
Time is money, and when it comes to compound interest, time proves to be very expensive. But that also means, more optimistically, that time is very productive!
Can everyone start saving $6000 a year at age 22? No, and there is no shame if living expenses, student loans, and other initial costs make it difficult to get to that number. But even a savings of $2000 a year (that’s $167 a month or $39 a week) from ages 22-30 can yield $263,611, and again, that’s assuming you stop saving after 8 years.
Much of retirement planning as you approach your retirement age, whether at 65 or 66 or 70 or 72 or never (you love your job and just want to make sure you don’t have to work to survive), involves figuring out expenses, social security, living within your means, having extra for emergencies and health care costs, and so forth. The less your savings bundle is, the smaller that nest egg, the more time you have to spend at the back end figuring out how to make ends meet.
So, in a way, taking the time now to figure out the right financial plan can not only save you money, but also save you time later on.
So what if you’re reached your 30s or 40s or 50s and have not started yet? Don ‘t worry! It’s never too late to start. The key is not to get passive but to begin now: $6000 saved every year for 8 years at 6% can still grow to over $120,000 by age 72, and there are many options in savings account that grow tax-free to help people “catch up.”
And if it seems daunting to go over a financial plan for something that will happen decades in the future, or if it seems scary to go over a financial plan when you haven’t been saving a lot, well, that is what financial planners are for.
Time is precious, but like money, a little spent now can save you a whole lot later.
Alex Urpi, CFA