This is part 4 of my Retirement advice for young folks series. In the first 3 parts, we talked about maximizing income and minimizing expenses. If you can stick with that, you should have some money left over to invest. Young people rarely think about retirement saving, but that is precisely the best time to invest for retirement.
Start investing as early as possible so your investment will have more time to grow. The stock market will be up and down in the short term, but historically it has been one of the best wealth generating tools over the long term. When you start investing early, time is your friend. Compound interest will work for you every year and you will be amazed what it can do over 30 years.
Stock and bond investment simulation
Let’s use my favorite retirement calculator Firecalc to see what your retirement portfolio can look like if you invest in the stock market over 30 years. I’ll invest $1,000 per month over 30 years for a total of $360,000.
Here is the result:
The lowest and highest portfolio balance throughout your retirement was $0 (started with $0) to $1,854,288, with an average of $980,861.
This can be a bit difficult to understand if you didn’t read my Firecalc review. The bottom line is if you consistently invest in the stock and bond market over 30 years, there is very little chance that you would come out on the losing side. The simulation covers periods of great upheavals including the Great Depression and the recent Great Recession. Even if you retire at the bottom of the worst bear market in history, the portfolio would still make a small profit. If you’re lucky, your portfolio could multiple 5 fold and end up totaling nearly 2 million dollars.
First full time job
When I started my first full time job out of college, I didn’t want to save for retirement either. I wanted to build up some cash savings first. However my dad convinced me to start contributing to the company’s 401(k) right away. This was by far the best investment advice I have ever received. Looking back over the record, it took me about 4 years before I maxed out the contribution and I stayed maxed out until 2012 (quit my engineering career.) When we got married, I convinced Mrs. RB40 to max out her contribution as well. In hindsight, maxing out the 401k contribution as soon as we did was the best move we could have made at the time. The 401k is the biggest chunk of our net worth now and I wouldn’t have been able to retire by 40 if we started later.
A stock market crash is good for young folks
When you are young, a stock market correction should be music to your ears. They are great buying opportunities available for young folks. Unfortunately, many people stop investing or pull their money out during these crashes. If your stomach can handle it, stay invested through a few of these cycles and you will see your portfolio grow after the market recovers. Remember this – you should be happy to be able to buy stocks at a discount if you have 10+ years before retirement. Don’t get caught up in the panic.
What to invest in?
Investing in the stock market can be a bit overwhelming to a beginner. The easiest way to start investing is with the low cost Vanguard mutual funds or ETFs. If you are just starting out, I would go with a stock index fund like VFINX or VTI. This will give you a stable base to start with. Once you are more familiar with stock investing, then you can branch out into dividend stocks, bonds, or other investments. When you are first starting out, adding to your investment is much more important than which stock to buy.
How about you? When did you start saving for retirement?