Retirement Investing – Use the Force Luke!

Retirement investing has one major question for everyone and I’d bet that if you ask 100 people the following question, you’ll receive close to 100 different answers.

What’s the question? Well, it’s not that hard.

It’s – “When is the right time to start investing?”

A simple question I’m sure you’d agree – but the answer can cost you a LOT of money – and the loss is purely down to how long you wait before you start saving!

Let me explain a little!

The honest fact is that nobody truly knows the right time to start investing for ‘random people’. So how do you know when it is your best time?

Well, to borrow a line from Star Wars, “Use the force Luke.”

Now the force in this answer isn’t some invisible cosmic energy, but instead is the investment force of compound interest.

First, it is very important to understand the difference between simple interest and compound interest. Simple interest can be figured by taking an initial investment that earns interest annually for a period of, for this exercise we will say, two years. After the first year you have your original investment plus the interest. In the second year you have the initial investment plus the interest for the second year, the interest from the first year is not added. Your interest is not being compounded so you are not earning interest on the interest that you have already earned.

This is what I’m talking about, this is the force. Compound interest is a force because you take that initial investment and earn interest in the first year, then in the second year you add the initial investment plus the interest from the first year and earn interest on the whole amount. The smart investor will always try to find a good situation with compound interest against a great situation with simple interest. With this knowledge it is time to see the difference between those who do use the force and those who do not use the force.

Bob starts saving at the age of 24 with a zero balance and contributes $200 monthly until retiring at the ripe old age of 65. By using an average annual rate of return of 12%, Bob can retire with $2,061,941.74. Bob will definitely be able to retire with comfort, the comfort of being a multi-millionaire!

Now let’s consider those who do not use the force.

Carl starts saving at the age of 40 and because dear old Carl is further in his life, we can assume that he started with an initial investment of $10,000 and contributes twice as much, $400 per month, with the same 12% average annual rate of return. Carl will retire at the same ripe old age of 65 that Bob did, but with a significantly smaller $886,803.53.

Now, that is definitely nothing to be ashamed of by any means and unless he has a very expensive habit such as buying first edition comic books – good old Carl is in for a happy retirement.

But it does demonstrate the importance of using the force!

Bob started younger, paid less, and used the force to the tune of almost three times as much money for retirement.

Now you have been empowered, you understand what the force is and how to use it. You understand the importance of starting early and earning on your money, then earning for your earnings.

Use the force! It’s no fluke Luke, I can assure you!