If I'd Only Listened to Myself in High School

When I was a freshman in High School I wanted to invest in the stock market. I, of course, had no idea what that really meant or how to do it, but it seemed interesting to me. My parents, who at the time equated the stock market to something akin to three-card monte in Times Square, told me I could invest when I had saved $1,000 from my paper route. If I had invested my hard-earned $1k into the “stock market” as measured by the S&P 500 then (1979), it would have grown to $77,217 as of the end of this October. And, get this, if I had added just $500 each year to that initial $1,000 investment, the total would now be $400,446. Holy compound earnings, Batman!

An opportunity: new contribution limits

Now I suspect, dear reader, you already understand the principle of compound interest and, while the numbers are eye-opening, this really isn’t news. So, let’s take that principle and apply it to an opportunity for you. The IRS just announced the limits for contributing to a 403(b) or 401(k) will increase $500 per year in 2019. So, you will be able to contribute pre-tax $19,000, up from the current $18,500. What if you take advantage of this new opportunity and increase your contribution that extra $500?

• If you are 40 and add $500 per year to your contributions until age 65, earning an average annual return on that investment of 7%, you will have increased your retirement account total by $31,624. Enough for a nice, new car!
• If you are 50 and do the same thing? An extra $12,564.
• If 50, how much extra would you have to invest to match the total of the 40-year old? An extra $1,258 per year!
• Incidentally, if you invest that extra $500 per year, your take-home pay will only decline by about $350 because it won’t be taxed when you contribute it. So, instead of that $500 in earnings being split $350 to you and $150 to the government, all $500 will go to you.

A real-life lesson

We often freshen-up client’s financial plans when their circumstances change, or when they are approaching retirement or their financial independence. What that process invariably reveals is how the power of time and compound earnings serves as a very powerful tail-wind, pushing us toward our goals. As we get closer to our target, however, that tail-wind slows. The example above shows it perfectly – an additional 10 years of saving provides an extra 2.5 times the end total - $31,624 versus $12,564.  

Now, to be clear, it’s never too late to get on the right track. But, if you get a late start, it will take extra effort in the last few years of your earnings career to save what you’ll need to cover your expenses throughout retirement. So, no matter your age or distance to your goal, consider increasing your annual retirement plan contributions in 2019. You’ll be glad you did.

Steve Byars