Start investing as early as possible

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.

start investing as early as possible

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.

market crashes good for young people

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? 

If you need help keeping track of your finances, try using Personal Capital to manage your budget and net worth. It can help you keep track of your income, expenses, and net worth, all in one place. Personal Capital is geared for investors and has many great tools. See my review of Personal Capital and how they helped me reduce what I’m paying in investment fees.

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Joe started Retire by 40 in 2010 to figure out how to retire early. After 16 years of investing and saving, he achieved financial independence and retired at 38.

Passive income is the key to early retirement. This year, Joe is investing in commercial real estate with CrowdStreet. They have many projects across the USA so check them out!

Joe also highly recommends Personal Capital for DIY investors. They have many useful tools that will help you reach financial independence.
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40 thoughts on “Start investing as early as possible”

    • Roth IRA – You can open an account at a brokerage and control it yourself. You can invest in anything you like. You can only contribute a limited amount, $6,000 in 2019.
      Roth 401k – You can contribute to your workplace’s 401k plan and treat the money as Roth. The investment is limited. The good thing is that you can contribute more money, $19,000 in 2019.

  1. I started my retirement savings quite late, and wish I had started investing earlier. In the initial years of my career, the thrill of earning your own money and having the freedom to spend it got me into spending recklessly. Now when I look at what I have, I find there are soooo many things I bought which I don’t need at all…..

  2. I got involved in the stock market because I needed some beer money. I remember back then one of my stocks did well and I used to profits to hit up Montreal!

    Then I got out of the stock market. I took a risk by buying a condo. It has gone well so far. I just got sick of stocks.

    What would you invest in if you were 24?

    • I would go with low fee Vanguard funds to build my base. I was stumbling around investing in random stocks when I was 24 and investing in low cost funds would have been a better move for me.

  3. I do think this sort of analysis needs to take into account demographic trends. The US over the course of the 20th century was bolstered by a growing population. That’s where maybe 2/3rds of our GDP (and presumably equities) growth came from. It’s about to come to an end though – none of the replacement generations are as big as the boomers.

    The results are likely to be a lower growth environment I think.

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  5. I completely agree that the stock market will experience ups and downs — investing in the market will most often grow your portfolio beyond the total cash you put in.

  6. Yes, a lot of people don’t realize how much of their portfolio will be growth, even with an aggressive investing strategy. Allowing sufficient time and having the patience and the discipline to allow your portfolio to mature into an asset that can sustain you is an important part of of the game.

    I agree with your advice on how to ease into investing.

  7. Prior to shipping off to boot camp at 19, my father made me open up a Roth IRA. I had absolutely no idea what stocks were let alone a Roth IRA. But my dad wasn’t the type of man who you had discussions with, even at 19, I knew to just do what he said. In all honesty I don’t think my dad knew all that much about stocks or investing. What he did know however is that the early you start investing the easier it is for you to retire. As a young soldier you don’t have too many expenses so I was able to put $100/month towards my retirement accounts.

  8. I was putting 10% on my 401K on the 2045 fund and just recently i moved it all to S&P500 and brought it down to 5%, i opened a Roth IRA at 5% to split both so i have a pre tax and after tax savings.. when things go well, i am hoping to max out my contribution to the Roth IRA by April of every year. Did i make the right decision?

    • I personally agree with your strategy. For one thing, I’m not a fan of the target date funds because I want to be the one who decides my asset allocation. I think most target date funds get too conservative too fast. I also am a fan of tax diversification, so I think it’s great to split between a pre-tax account and a post-tax account. The one thing I’d urge you to consider is your employer’s match. Does reducing your 401(k) contribution to 5% result in you missing out on the full match?

      Also, depending on your specific goals, 10% may not be enough. If you are satisfied with your job and plan to work into your 60’s or even 70’s, it should be fine, but if you get the early retirement bug and want to leave the work sooner than that, you should try and find ways to save a bit more.

      • that’s one thing i wasnt too motivated with putting a lot on my 401k since my employer dont match. im due for my annual review and ill see if i get lucky, i might bump it up to 7.5% and gradually put it back on 10% again, since its pretax, its out of my hands before it even touches my bank. so what i dont see wont hurt me lol. whew, thanks for your feedback, i now feel better. i love this blog.

    • I think you made the right decision. Once you max out the Roth IRA, then you can try increasing the 401k contribution again. The Roth IRA will give you more option with taxes in the future. Great job!

  9. I didn’t start saving cash until too late in the game, although once I sold my business I was able to catch up in a hurry.

    Starting early is a great message, Joe, and so difficult for young people to actually hear. There are so many priorities….yet you’re right on. Accepting your dad’s advice was absolutely huge.

  10. I started saving for retirement in college. I put the minimum in my 401(k) to get the full match the first year in favor of cash savings to buy a car. My second year and later, I’ve been maxing out the 401(k), even as the amount has been going up. It’s amazing how fast the balance grows when you put $17,000 into it!

    I completely agree with you that it matters more when you are first starting out that you add money than what exactly you buy. I really had no idea what I was doing when I first started, but putting the money in something sure was the important part!

    • Wow, that’s awesome. So many people started saving when they were in college. I didn’t have any money at all when I was in school. 🙂

  11. I started with my first full time job and have been increasing my contributions ever since! I max out my Roth IRA every year but haven’t maxed out my Roth 401(k) yet. They are harder to Max out than regular 401(k)s because the dollars are post tax instead of pre tax.

    • I’m curious as to why you chose Roth for both your IRA and 401(k). Most of the advice I hear tells you to invest in both pre- and post-tax accounts for your retirement since you can’t be sure what your future tax rate will be.

      • For me, I invested over 10 years with the traditional 401k. Then I went with Roth 401k over the last few years because it will diversify my tax strategy. The total amount in traditional 401k is still higher than the Roth 401k.
        Also I saved more overall with Roth 401k than traditional 401k (17k post tax vs 17k pre tax.)

    • Great job with the Roth IRA. I like the Roth 401k too because you can contribute more. 17k after tax vs 17k before tax. My tax rate was getting higher though so I went back to traditional 401k in 2012.

  12. Great series Joe! Investing topics is my new obsession as I am getting serious about my investments. I’m curious though. Do you think it’s better to max out your 401k/403b before using a Roth IRA? I prefer the tax benefits of maxing out my roth before maxing out our 403b’s. Since we’re young and at the bottom of our income scale (as opposed to what it will be in 5-10 years), I think it makes sense to go match 403b, then roths, then back to the 403b. We’re not at the point of maxing out both, but eventually that would be pretty sweet.

    I’m also debating between using a taxable acct before going back to max out the 403b/401k for the purpose of being able to access it before retirement age (without huge penalties).

    • I’ll write more about that next time. I think you are doing the right thing because your tax rate is low now. When you make more money, it’s probably better to max out the 403b first.

      • I was going to ask this question too. I’m currently putting enough into my TSP to get the full match (5%) but then I’m maxing out my Roth IRA. After that I’m socking some money irregularly into a normal investment account where I’m buying mostly dividend stocks (which I reinvest). I’m not sure if I’ll ever max out my TSP contributions, but I think I’m going to try that next year. I’m just trying to keep up a good mix. I’ve got almost 30k saved at 25, so I feel like I’m doing ok. There are just so many options, it’s hard to know what is best.

        • I think you are doing pretty well so far. I think the TSP is a good plan. You’ll save on tax. I’ll write more next week about all the retirement options.
          Dividend stock is good, but you are paying a lot of tax. The stocks are purchased with after tax dollars, you’ll pay tax on the dividend, and any gain when you sell too. If you go with TSP, you won’t have to pay any of these taxes until you withdraw in retirement.

  13. We are saving through my 401K right now. We will fund our ROTH IRAs later in the year. Right now I’m doing research on how my husband can fund his retirement account. He doesn’t have a 401K available at work. Any ideas?

    The hard part for me is figuring out how much to put in 401k, ROTH IRA, down payment house savings, cash, and vacation funds.

    • I think he can just open a traditional IRA at a brokerage. I need to do more research. I know it’s hard to figure out all those things. Good job so far though. 🙂

      • I have been reading up on traditional IRAs. I’m confused on how much he can contribute since I have a 401k plan. Plus, I think there is a limit on how much you can contribute on a traditional IRA that is tax deductible if he also contributes to a ROTH IRA.

        Having an account on top of the ROTH IRA would allow us to stash more money pre-taxes.

        • Sorry, I don’t know either. I’ll do some research. I thought it was the same as the 401k limit – 17.5k. Thanks for giving me more work. 🙂

  14. Great advice! I started saving for retirement when I was an undergrad in college. The first stock I ever purchased was also, coincidentally, VFINX. I’m glad I started when I did, and the 2008 to 2009 crash really helped me build a strong foundation, since prices were so cheap. Most of my 401k and Roth IRA gains were made because I bought in at the best possible time. Although it was hard to know that then. Most of my coworkers were shaking in their boots and shunned the market completely during that time. Now, I only wish I bought more stocks… A down market is an investor’s best friend!

    • Wow, it’s impressive that you started saving that early. Staying in the market during the down cycle is really hard, but it’s essential. That’s when you’ll make money! 🙂 It took me a few years to learn that too.

  15. Hey Joe, just wondering though… why has a large 401K balance helped you retire given we aren’t allowed to touch until 59.5 without penalty? Is it just the comfort knowing you have a large balance?

    I’ve completely written off my 401K and just hope it will be there when I’m 60.

    What gave me confidence to retire from corporate was my savings and alternative income streams.

    Rgds, Sam

    • You actually can access your 401k money before age 59.5 without the 10% penalty by using 72(t) distributions or substantially equal payments. This link has a pretty good explanation of how they work.

      As for me, I’m still contributing to my 401k but I’ve since backed it down to 6%, which is the max for me to get the matching from my employer. After my contribution, the employer match and assuming the profit sharing continues I get to invest a total of 15% in my 401k. That way I still save a good chunk of money in 401k in case I don’t hit early retirement and can shift more cash to my taxable FI portfolio.

      • I plan to avoid the 72(t) distribution. The earlier you withdraw, the less you will have in retirement. Alternative income streams will enable me to put off withdrawal until 60. If that doesn’t work out, I’m willing to work part time before withdrawing early.

        • I’m still probably 12 years from having to make that decision. The goal is to not have to worry about the 72(t) because like you said you won’t be getting a large monthly amount. I was more pointing out that it is a way to access that money without paying the 10% penalty.

    • It’s the combination of of 401k, saving, and alternative income streams for me. My 401k account gave me the confident to stop (greatly reduce) saving for retirement. If I don’t have any retirement saving, I wouldn’t worry too much about my retirement to quit. I still believe in the stock market and I think my 401k should keep growing over the next 20 years. It’s not enough to cover my retirement right now, but if I leave it alone, we should be in a good position in 20 years.

      The alternative income streams will enable me to put off withdrawing until I’m 60.


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