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.

Meet Rex. He’s your typical college graduate that got a great job.

  • He makes $200,000/year. (Okay, not your typical college graduate. He had connections. Major connections.)
  • But Rex likes nice things. And work is his life. When he’s not at the office, he’s out with the ladies thinking mostly about the office. And the ladies. In the office. “I’m only young and gorgeous once,” says Rex. The ladies swoon (only the idiots among the females, obviously).
  • Rex sticks to the default deferral his company set up for his 401k of 3%. Though his company will match 50 cents on the dollar up to 6% of his pay, Rex doesn’t want to save 6%. That would cramp his style. And his car payments (because, of course, Rex bought his car with a loan instead of saving money to buy it outright). So, Rex is saving $6000/year in his 401k and his employer is adding another $3000 for a grand total of $9000/year.

Now meet Slayer.

  • Slayer only makes $60,000, but he works hard, understands the value of a dollar, and knows that saving is a good idea.
  • He doesn’t have credit card debt and he waits to buy something until he has cash in hand to do so.
  • Slayer decides to save $10,000 of that money every year. After the full company match of 50% up to 6% of income, Slayer has a grand total of $11,800 going into his 401k.

Then there’s Fyre (pronounced “Fire.” Duh.)

  • She makes only $50,000/year.
  • She thinks differently. And she’s fine with that.
  • She is good at her job, but likes doing her own thing better. She has big plans to fly this coup and work on her own in a few years.
  • Rex thinks she’s trash because she drives a used car. And if she ever goes out to eat after work (which is rarely), Fyre doesn’t buy all the appetizers, drinks, and desserts. Rex pities her a bit. She must be poor.
  • But Fyre maxes out her 401k contribution at $18,000/year and her employer adds another $1500 which brings her 401k savings to $19,500 annually.

Assuming the same 8% interest rate and also that none of them changed their savings strategies or ever got raises (they work for a dumb company), let’s see where these guys are all at in ten years through the power of compounding (wait, let’s do that again in an booming voice), the POWER OF COMPOUNDING. (That’s better.)

Rex – $137,209.52. Assuming he hasn’t raided it yet. Also, his waistline has expanded. Partying is starting to catch up to him. Uh oh. And after working 28 total years, Rex still won’t be a millionaire!

Slayer – $178,896.32 – Feeling pretty good. On track to have nearly $1.5 million in 20 more years.

Fyre – $297,287.30. More than double what moneybags Rex has. In four more years, she can leave this place and do her own thing and have $20,000/year with which to do it. She can leave in less if she invests in anywhere other than her 401k.

Moral of the story: Don’t be Rex. He’s dumb. Slayer is doing well. He’s successfully rocking the “work 30 years” thing. But you could also be Fyre (though she’ll never be included in your company’s financial newsletter because they don’t want you to think about this possibility). You could live on less, save a lot, and leave the office nearly twenty years early.

Another moral: your income doesn’t determine your outcome. This is a “choose your own adventure” story. The POWER OF COMPOUNDING (did you do the voice in your head?) is real.

Start saving now.