Closer Than You Think
I recently stumbled upon a few surveys that were beyond concerning. Here are the headline numbers from each:
69% of American workers believe they could work until retirement age and still not have enough money to retire.
68% of Millennials don't believe they will ever be able to retire without receiving a meaningful inheritance.
Neither of these is surprising, but still concerning, nonetheless. Americans, on the whole, are tremendously underprepared for retirement. I feel that way on a family-by-family basis, and the average and median retirement savings numbers also back it up. We are woefully prepared for the next chapter of our lives, which is a deeply concerning trend.
However, I have good news for you today. Strike that, great news!!!!! I have great, amazing, fantastic news for you today. If you've been trying to make progress on the retirement front but feel like you're not getting as far as you had hoped, you're probably closer than you think.
Last week, I met with someone seeking investment advice. In his words, "I've been saving for nearly a decade, and all I have to show for it is $100,000. I'll never get to a million. I don't even feel like it's worth trying anymore."
My response: "Congrats, you're a third of the way there!!! Keep going!"
Him: ..............
Now, it's obvious that $100,000 is not 33% of $1M. Any idiot can tell you that. From a sheer dollar perspective, he's only 10% of the way there. However, investments (if done right) don't work on a linear scale. In the financial world, we call it compounding. When our money is invested, we make money on our money. Then we make money on our money plus the money we previously made. Then we make money on our money plus money on the money on the money. It's a cycle that speeds up over time.
Here, let me show you with an illustration. This is an example where someone invests $500/month and earns an average of 9% per year over the long run. We obviously won’t earn a consistent 9% over time (it will be a bumpy road for sure), but this makes for a useful visual:
As you can see, it takes a little more than 10 years to accumulate the first $100,000. That was the hardest part, and often where people get frustrated and give up (i.e., the studies referenced above). However, because of the power of compounding, the second $100,000 only takes five-ish years (half as long!). The third $100,000, only 3.5 years. All the way up until that last $100,000, which takes just over a year to complete. From a time perspective, you're halfway to your $1M goal by the time you hit $200,000. Crazy!
This is a concept that's hard to wrap our minds around, but is so freeing once we do. I do my best to beat this into the head of anyone who is feeling discouraged by the process. It's so easy to give up along the way if we don't understand just how powerful this compounding thing will eventually become.
Don't be discouraged. Have a sense of urgency, yes, but don't feel defeated. Keep pushing through, and let compounding do the heavy lifting for you.
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