Reason 1: Not starting early hurts you in the long run.
In this scenario, their starting salary is $100,000, and they both get a yearly raise of 3%. Oreo starts by investing 20% of his portfolio in year 1, and Kiara begins with 35% in year 10. Every 10 years, they add another 10% to their contribution. Kiara will go from 35 to 45% in year 20, then 55% in year 30. They both earn 7% from the stock market annually.
After 40 years, Oreo ends up with $1,340,475 more despite investing $15,835 less.
Reason 2: If you start early, you can give up early
In this scenario, they both invest $20,000 per year. As usual, Kiara starts at year 10 and invests consistently till year 40. Oreo, on the other hand, starts at year 1 but stops at year 10. They both earn 7% from the stock market annually.
Despite investing for only 10 years, Oreo ends up with $66,368 more.
Reason 3: Earlier contributions account for most of your final returns
In this scenario, Oreo's salary is $100,000, and he gets a yearly raise of 3%. Oreo invests 20% of his salary every year.
In his first ten years, Oreo contributes (red bars) $229,278.
In his last ten years (years 31 -40), he contributes $556,517.
His first $229,278 grows to $2.5 million dollars.
The last $556,517 reaches $810,000.
In his first 10 years, he contributed 15% of his total contributions. But it accounted for over 40% of his final portfolio value by retirement.
In the last 10 years, he contributed 40% of his total contributions. But it accounted for only 13% of his total portfolio.
The earlier contributions are exposed to more market cycles. What's not immediately obvious is how much of our future savings are locked in our final working year. If we lived longer, this wouldn't matter, but we typically die before the difference becomes insignificant. If you're interested in diving deeper, start with:
- Lifecycle Investing - Invest Time For A Better Retirement Outcome (2020): a holistic investing approach
- Lifecycle Investing - The New Free-ish Lunch (2020): optimizing risk & reward with leverage
Young investors can tilt the game in their favor simply by starting early. Time is a cheat code.
These models depend on stock market returns. For example, if market returns are subpar, Kiara will end up with more because she saved more. But if returns average out to their historical levels, starting early is better.