Happy Summer! I spend a lot of time, especially in difficult markets, discussing the importance of understanding your investments, market cycles, and staying the course with your personal portfolio.
It has dawned on me that we need to take a step back and look at what is really doing the heavy lifting on our wealth accumulation journey: saving.
If you aren’t in the wealth accumulation phase, please read anyway, because a child, grandchild, niece or nephew may need some sage advice from you!
The author Morgan Housel defines wealth as the ability to wake up in the morning and say, “I can do whatever I want today.”
Some people are blessed to have a valuable business or property to sell, or a significant inheritance. The rest of us must accumulate wealth by saving and investing.
Don’t we all have the fantasy about getting rich quick: the winning lottery ticket, slot machine, or a lucky break like Forrest Gump who bought the first shares in Apple, thinking he was buying fruit?
What else do these fantasies have in common? Little cost, big payoff!
How much sacrifice is involved in buying one lottery ticket?
I think investing can capture our imaginations in a way that can lead to disappointment by thinking that investing alone can replace the need to sacrifice and save diligently.
Why stop spending and start saving? Isn’t the stock market supposed to build wealth for me, and fast?
Understanding how math concepts work in real life isn’t one of our strong suits. We’re people, not spreadsheets!
Compounding is a marvel of wealth building that is critical to understand- we must wrap our heads around the fact that the main component of investment success is not luck, not skill, but TIME.
Our frontal brain lobes, responsible for reasoning, planning, judgment, and impulse control, have barely finished developing during the window of time when our prospects for long-term wealth accumulation are optimal- our mid-20s.
This can explain why many of us are not where we need or want to be!
There is a Chinese proverb that says “The best time to plant a tree was 20 years ago. The second best time is now.”
But back to the heavy lifting- investing alone cannot transform minimal savings into significant wealth.
I had a person recently tell me “I started an IRA a few years ago and it has barely done anything. I want to give up- investing doesn’t work!”
Impatience has sabotaged many an investment account– expectations are way off based on fuzzy math (or maybe Hollywood? Thanks a lot, Forrest.)
The later you start, the more ground you must make up, and the more impatient you become. This goes about as well as you would think, but it is also the most common scenario I encounter.
Let’s switch off the magical thinking and start working a realistic plan! The results can be just as wonderful.
The overall equity market as tracked by the S&P 500 has annually averaged 8-10% historically. Compounding these types of average returns can look like this (based on math, not investment guarantees):
One Roth IRA Contribution
Annual Roth IRA Contributions
Saving a total of $328,300 worth of Roth IRA contributions over 28 years could accumulate into a nice, tax-free nest egg; I wouldn’t be surprised if a person with retirement savings like this was on track for financial freedom at the age of their choice.
One thing I’d remind the 25-year-old: the road to an investment portfolio’s long-term average returns is quite a bumpy one.
The ride isn’t as smooth as this spreadsheet predicts- sometimes it is a rocketship ride, sometimes a rollercoaster ride, and sometimes it feels like being stuck in traffic.
The earlier we hit the road, the sooner we will get accustomed to its twists and turns. Staying on course will become easier when we see the fruits of our perseverance and sacrifice.
We may not always love the journey, but a savings strategy like this is the path to our desired destination.
Saving and planning is hard- spending today is fun. After all, tomorrow is not guaranteed.
Too true- but I want my clients not just to squeak by in retirement, but to be financially unbreakable.
To me that means lifelong financial independence and dignity. That takes some planning, saving, and yes, some sacrifice.
If you’d like to see on paper how much you need to save to reach your goals, let’s get together and figure it out!
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Securities and Retirement Plan Consulting Program services offered through LPL Financial, a
Registered Investment Advisor. Member FINRA/SIPC. Investment Advice offered through Western Wealth Management LLC, a Registered Investment Advisor. LPL Financial, Kennebec Wealth Management LLC and Western Wealth Management LLC are separate entities.
A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.