A while back, I gave our Foolish calculators a spin, to check how much I'd have to save to retire securely. I knew that the earlier you start to save and invest, the better off you'll be. But I didn't realize just how huge a difference a few years can make.
The numbers tell the story
Suppose you begin saving at age 45, and invest $5,000 per year for 20 years, earning 10% per year and experiencing 3% annual inflation. You'll end up with an expected $286,375 before inflation, and $204,977 after inflation. If you put all this off for 10 more years, and don't begin saving and investing until age 55, you'll have to sock away $18,000 a year -- or delay your retirement until age 75 -- just to end up with the same amount of money!
In contrast, if you begin at age 25 under otherwise identical conditions, in 40 years you'll end up with $2.2 million before inflation, and nearly $1 million after it. Delay your retirement until age 67, as many 25-year-olds today will likely end up doing, and you'll end up with more than $450,000 extra. Meanwhile, an investor who starts at age 45 will have only 22 years until they turn 67 and will have to sock away more than $37,000 per year to amass the same ultimate sum. I don't know many people who could do that.
The big picture
Are you about to bash your 50-year-old head against a wall? Please don't -- all is not lost:
- You may be able to save more than $5,000 per year. One rule of thumb is to save and invest 10% of your income, but the higher your percentage, the better off you'll likely end up.
- Even if you start investing at age 50, you have a good amount of time in which to accumulate wealth. If you can invest $10,000 per year for 20 years, earning the market's historical average return of 10%, you'll end up with more than $570,000 before inflation, and more than $400,000 after. Not too shabby, eh?
- On the other hand, remember that that 10% return is very hypothetical. Sure, it's the market's historical average, but with even big stocks like Citigroup (NYSE: C ) down more than 80% in the past year, you can't count on it -- especially over short periods of time.
Find good investments
But over the long haul, good returns aren't always hard to find. Even well-known companies can give you market-beating performance over longer periods of time. Kimberly-Clark (NYSE: KMB ) , for example, has advanced by an annual average of 11% over the past 20 years. Wal-Mart (NYSE: WMT ) boasts a 13% return, while Coca-Cola (NYSE: KO ) has averaged 12%. (How they'll do over the next 20 years is unknown, of course.)
And while many mutual funds underperform the market, the best of them can really pack a punch, protecting you from the worst of it when most stock investors are suffering big losses. For instance, the Yacktman Fund (YACKX) has beaten the S&P by nine percentage points annually over the last decade and is up over 28% so far in 2009. Its recent top holdings included AmeriCredit (NYSE: ACF ) , Liberty Media (Nasdaq: LINTA ) , and Williams-Sonoma (NYSE: WSM ) .
Whether you go with stocks or funds, don't wait. Start investing today, and get yourself on the path to higher returns.
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