***The following was originally posted on PWA’s main website in 2008. It is reposted here in its original form.***
The following is an illustrative story only. Any similarity between the characters portrayed here and any actual person, living or dead, is purely coincidental.
Meet Mike and Ike Jones, 23-year-old twins from Tampa, FL who recently graduated from Clemson University in South Carolina. Both are engineers by education and have taken entry-level positions with an esteemed construction management company in Atlanta, GA where they can make good use of their civil engineering degree. Both Mike and Ike have a some college loans outstanding, but are making a decent salary of $45,000 / year and are paying loans down as planned. Mike has always been a bit more mature than Ike, and has always put building a successful future for himself ahead of having the most fun possible in the present. Ike is also generally responsible, but tends to focus on today more than tomorrow. As they’ve both been with their company for 2 years now, they’ve recently qualified to start contributing to the firm’s 401k retirement plan. While the company doesn’t match contributions, Mike and Ike both realize the value of tax-deferred growth in such a savings plan. Mike decides to immediately start contributing to the plan, deferring $5,000 of his salary each year for the next ten years. Ike, on the other hand, decides that there is plenty of time to save for retirement and decides to wait ten years before contributing.
At age 33, after 10 years have passed, Mike has a dramatic lifestyle change and can no longer contribute to his 401k as he needs every dollar to pay the bills and support his pregnant wife and 2-year-old child. He never contributes another dollar to his 401k. Ike now at age 33 decides to start contributing and contributes $5,000 per year for the next 32 years until both brothers retire at age 65.
Let’s assume both brothers earned an average annual return of 10% on their 401k account balance. After 32 years of contributions and that 10% annual growth, Ike’s account balance would be just over $1.1 million dollars. But, with only 10 years of contributions and earning that same 10% per year, Mike’s account balance is $1.85 million dollars! Even though he put significantly less into the account over 42 years, the fact that Mike started contributing early allowed the “miracle” of compounding to produce 66% more money for retirement than his brother.
The lesson here is clear. Start saving early in life and you wind up letting your money work for you longer. The longer your money’s working for you, the less time you’ll have to spend working for your money.