If You Have the Time, You Don’t Need the Money

Posted 10:09 PM by

It is important to help people, particularly young people, understand how time is on their side.  Most people have an intellectual understanding that starting to save when they are young is helpful.  I do not think most people (even older people) understand just how much time can help.

How is this?

Which is better, saving $1 for every $10 during financial independence or $15 for every $10?

If you want to achieve financial independence ten years into the future, you need to save $15 each year for every $10 you want to spend each year in the future.

If you want to achieve financial independence forty years into the future, you need to save $1 each year for every $10 you want to spend each year in the future.

To retire at 65, start at 25 and contribute 1/15 of what you have to contribute if you start at 55.  Interest on your contributions provides the rest of the funding for your financial independence.

How do we get there?

On pretty much every financial topic there are differences of opinion.  To make my calculations, I chose these assumptions:

  • Average earnings rate 7%
  • In retirement, you can spend 5% of your nest egg each year to have it last 30 or more years

If we start with a plan to draw $100,000 from our retirement savings in addition to any pension and social security we choose to consider, we need $2,000,000 at retirement.  That represents spending 5% of your retirement savings.

Next we determine how much we have to save annually to accumulate $2,000,000 at 7%.  You would have to save $144,755.01 annually. That translates into $14.48 per $10 of annual income in retirement.  I rounded to $15.

But what if we have 40 years to save the $2,000,000?  Now you would have to save $10,018.28 annually, or $1.00 per $10.

For a second example, we might find someone seeking to draw $30,000 each year.  To generate $30,000 with a 5% rule, we will need to accumulate $600,000.  Over 10 years, our client would have to save $43,426.50 or $14.48 per $10.  Over 40 years, the client would save $3005.48 per year or $1.00 per $10.

Is that a compelling way to talk about saving early?  I would love your feedback.

Comments (6)
Kate wrote
I think this is very compelling, but I think about this math frequently because I'm a financial planner (and an early saver). I think for young people/non-financial planners a chart would really clarify this comparison. The aspect you added to what are otherwise similar materials I've seen is quanitfying and comparing two very different ages. I usually see people compare over a span of a few years, or 10 years, but you chose 40 years and I like that. I think it's important for young people to visualize what it will be like for them at age 55 or 65 because it can simulate saving as more of a "now" experience rather than a future experience which can be postponed.
Posted Dec 21 2012 7:01 PM
Carol Smith wrote
Hello thansk for this wonderful explanation. I think it would be helpful to know the same calculations with an annual earings rate of 3% or 4% not 7%. This would make for a worst case scenario and more realistic for todays investments in low interest rate world and volatile stock market. I would assume this would translate into saving even more no matter what the age....thank you Carol
Posted Jan 3 2013 3:04 AM
John Comer (Author) wrote
Carol, I do not think 3 or 4 percent is a realistic assumption over a 70 year lifetime (40 years of accumulation plus 30 years of spending) or even a 40 year lifetime (10 years of accumulation plus 30 years of spending). The Dow Jones returned 12.87% in 2012 according to Morningstar. I have more faith in our economy than that. However, with 10 years to save, you would need $16.66 for every $10 in retirement. With 40 years to save you would need $2.10 for every $10 in retirement. John
Posted Jan 3 2013 12:40 PM
Virginia Nasworthy wrote
John, I agree with your assumptions, and you make a compelling argument, however I'd like to know more specifics about your audience. Young adults seeking financial advise are likely to comprehend the illustration as presented. However young adults starting their first professional employment are likely to struggle. The basics of financial fitness are largely neglected for the youth in today's instant gratification society. I have friends that are sending children off to college that have no grasp on the cost of living, inflation, or taxes, much less how to balance a checkbook or calculate interest on a credit card balance. I think it is just as important to teach young adults how to spend efficiently as it is to teach them how to save appropriately.
Posted Jan 3 2013 2:21 PM
John Comer (Author) wrote
Carol, Sorry those numbers were for a 4% rate of return. $16.66 for every $10 spent in retirement for 10 years of savings. $2.10 for every $10 in spent in retirement for 40 years of savings.
Posted Jan 3 2013 10:03 PM
John Comer (Author) wrote
Virginia, Yes, all of that is important. All of that education is lacking. There are people who are working to deliver that education and they are making some progress. As young adults start to decide how much to spend on rent and cars and technology, I would like them to understand that if they choose to postpone savings they are giving up a lot of earning power. John
Posted Jan 3 2013 10:11 PM
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