#saving #investing #time #luck

$SPY $SPX

*“Investing for a lifetime payoff should start early*!” — Paul Ebeling.

You can turn yourself into a multi-millionaire by saving for retirement for only 5 yrs. Start at 25 anni, and you will be giving yourself the greatest gift an investor can have that is Time.

Time is very important.

Let us assume that you are 25 yrs old and decided that when you are 30, you will start a long-term savings plan for your retirement. And we will assume that you will retire at 70 anni.

Not a bad plan, but there is better.

You are 25 and you have an Ok job. You do not have lots of money to spare, but you figure out how to save $500 a month for your long-term future. That adds up to $6,000 a yr, which you can put into an IRA, either a Roth or a traditional 1 in which you can defer taxes on the 1st $6,000, making it less expensive at the moment.

Do that for 5 yrs and you will have invested $30,000.

During the 5 yrs, your investments are earning a return, though it it impossible to know how much.

If we assume you receive the very-long-term compound annual growth rate of the S&P 500 index SPX, +0.23% — 10.7% — your $30,000 would grow to $37,144 when you are 30.

Good luck, bad luck applies here.

- If you are unlucky enough to be 25 at the start of a string of years like 1970 through 1974 (with annual S&P 500 returns of 4%, 14.3%, 18.3%, -14.7% and -26.5%) your $30,00 would be worth only $22,998.
- On the other hand, if you are lucky enough to be 25 at the start of a string of years like 1995 through 1999 (with returns of 37.5%, 22.9%, 33.3%, 28.5% and 21%) you’d have $65,323.

In any of these cases, your $22,998 or $37,144 or $65,323 seems like only a tiny start toward $4-M. But every penny of it is money you will not have if you wait until you are 30.

Now assume you invest only that money for the next 40 yrs in the S&P 500. Since Y 1928, the average 40-yr compound annual growth rate of the index has been 11%.

Now let us assume you achieved that from age 30 to 70.

There will be great yrs for the stock market, and there will be yrs where the market goes down and your portfolio shrinks. So, history is the best guide we have.

Given these caveats and depending on whether you start at 30 with $22,998, $37,144 or $65,323, at age 70 you would have $1.49-M or $2.41-M or $4.25-M.

Those numbers came from only $30,000 of your money without assuming you invested anything after your 30^{th} Birthday. See why a long time horizon is so powerful in investing?

Luck is important, but time is more important.

This plan lets the ups and downs of life get in the way after age 30. But I’m presuming that after five years of savings, you’ll have good habits and will continue contributing to your IRA, leaving you with more money at age 70.

Now, consider your investment is 100% in equities that you made over just 5 yrs the jewel of your retirement portfolio.

You will improve your results a lot if instead of putting your money into an IRA, you participate in a 401(k) or similar retirement plan in which your employer offers a 25% match. That will add $1,500 a year to your own savings. And is like free money to you.

Again using the three rates of return we assumed above (unlucky, average, very lucky), this employer match will leave you with an additional $5,750, $9,286, or $16,331 at age 30.

Those extra amounts, invested for the next 40 years at 11%, would add $373,755, or $603,598 or $1.06 million to what you would have at age 70.

That’s the value of choosing a generous employer, so choose carefully.

And remember that the 3 figures resulted from only $1,500 a yr for those early 5 yrs: $7,500 in total.

It is no secret that over the long term other asset classes have outperformed the S&P 500.

US small-cap value stocks RUJ, hold the best record for beating the S&P 500. From Ys 1970 through 2020, they achieved a compound annual growth rate of 13.5% Vs the S&P 500’s 11%.

For the 5 yrs of investments that we are discussing, you can easily put that information to work for you. I suggest a 50/50 combination of the S&P 500 and small-cap value stocks. Over the 51ys frame of Ys 1970 through 2020, that combination would have grown at an annual rate of 12.3%.

Applied to your own savings and your employer match, that asset combination would give you $65,285 by the time you are 30.

And if you invested that amount at the S&P 500’s long-term rate of 11% for another 40 yrs, you will wind up with $4.24-M at age 70.

Now, let us imagine that after 5 yrs, you are comfortable with this 50/50 combination of the S&P and small-cap value and you continue it for the next 40 yrs. At the long-term growth rate of 12.3%, your $65,285 would become $6.75-M.

Here I have shown you 3 simple steps to turn 5 yrs of $500-a-month savings into a multi-million-dollar nest egg for your Golden Years.

What I showed you is based on the assumption that you do not save another red cent for retirement after age 30.

But, it much more likely that you will continue saving, thus taking more advantage of that great gift of time.

As part of a smart investment strategy, you also should reduce your risk by putting other money into bonds. Talk to the financial firm handling your IRA or 401(k) or other financial pro about the right asset allocation for you.

Now, what would the result would be if after age 30 you kept investing only half as much: $250 a month or $3,000 a yr, with Zero employer match, in the 50/50 combination of the S&P 500 and small-cap value stocks.

The result: $11.96-M at age 70.

I know what you are thinking, and you are welcome.

But, hang on we have not even considered crypto currencies in my overview, learn more.

Have a prosperous day, Keep the Faith!