Mr. T’s work sends home a monthly retirement newsletter. I always read it cover to cover and find it hilarious. If you don’t know the basics of personal finance (you can’t think about early retirement without understanding some fundamentals), please don’t get your information from the company retirement newsletter. My first qualm with it is that it doesn’t ever move past the fundamentals of retirement investing. It doesn’t mention the possibilities. It makes all sorts of assumptions that aren’t hard and fast rules (retiring at 65, 8% interest, contributing the same percentage of income until retirement, etc.). But another issue with the newsletter is that it’s frightfully dull.
Let’s talk about compound interest. We’ll start with their assumptions (retiring at 65, 8% interest).
One boring day, Jim decided to start investing $100/month. Luckily, Jim was 25. What a smart guy. By the time Jim was 45, he had only put in a total of $24,000 but now he had $58,900. Stupid Larry forgot to invest any money at all until he was 45. Poor Larry. He decided to triple Jim’s $100 to catch up. He started investing $300/month. At 65, Larry had saved a total of $72,000 and had $176,706 with which to retire. Not bad. (Awful. It’s awful!). But what about Jim? He kept up that $100/month until he retired at 65. Over 40 years, Jim only had to put in $48,000 of his money. And at 65, he had $349,100. Moral of the story? Start investing now. $100 can go a long way.
The lesson is good. Remember that $100/month can mean nearly $350,000 in 30 years. But, there are so many things wrong with this story. First off, kudos to Jim on $100/month at 25. If everyone did that, the whole world would be rich. But at some point, Larry became way smarter than Jim because Jim was 45 and still only saving $100/month. Let’s jazz it up a bit. Cooler names. A better story. And less assumptions.
Read More
