Savings 1 Million in 1 Year (age 26)

**Hot dog** · 04-17-2008, 05:41 AM

Why wait til your 26 the earlier you start the better start now and you will be able to retire earlier

**noppenbd** · 04-17-2008, 05:43 AM

Obviously young people should max out their 401ks and IRAs if possible at age 26. That would be a fantastic start to saving for retirement. The danger comes in thinking that no more saving is required. Simply put, a million ain't what it used to be, and in approximately 40 years, it will be even less.

Someone retiring today with a million dollar portfolio, and using the conventional wisdom of withdrawing only 4% a year would have portfolio income of $40K a year (before taxes). Add in some social security and it would probably be enough to live on, but hardly a luxurious retirement.

Assuming 3% annual inflation, 41 years from now in 2049 a retiree with a million dollar portfolio could still withdraw the same $40K a year. However, due to inflation, the spending power of that $40K will have dropped 70% to $12K in 2008 dollars! I doubt many 26 year olds would be able to retire with a million dollar portfolio in 2049. Not to mention that many people would like to retire much younger than age 67.

So I think it is a good habit to start, and maybe it could be ratcheted down after the first year, but 26 year olds will not be able to "set it and forget it" with 1 year's worth of saving.

**noppenbd** · 04-17-2008, 05:47 AM

Could someone post the story link?

**jIM_Ohio** · 04-17-2008, 06:04 AM

This is basic compounding. The math is the same and has been for years. Early smaller deposits beat later larger deposits by up to 4X the amount.

Time is the biggest multiplier, not the amount invested.

Consider two people, both ages 26.
Person A invests for 10 years, age 26 to 35.
Person B starts investing at age 36 and ends 20 years later at 55.

Person A invests 10k per year from ages 26 to 35 and gets a 9% average return each year. 100k invested over the 10 years, age 56 they have more than $1 M invested. 100k turned into $1M a 10X return on investment (that is 1000%).

Person B invests 10k per year from age 36 to 55, they choose same investment and get same 9% return as person A. 20 years, 200k invested. At age 56 they have $550k. They invested TWICE as much and have HALF the return. The only difference was the time the first investment was made. 550k value with 200k investment is ~250% return on investment.

FYI at age 36 when person A stopped contributions and person B started, person A had a 180k head start from the 100k invested.

More notes:
Person B would need to invest 20k per year to approach same end value as Person A. That is 400k invested to get same $1 M at age 55. Same ~250% return on investment.

Person A, if they continue the 10k investment for 30 years, would have $1.5 M from 300k invested. 500% (5X) return.

Person A, if they increase contributions to 15k for years 11-20 and 20k for years 21-30 would have $2M at age 56 with $450,000 invested.

Start early, increase contributions when possible, and keep going. Compounding will really work if you give the money TIME to grow.

**Snodog** · 04-17-2008, 06:36 AM

But will 1 million be enough? 40 years from now 1 million will probably be worth about the same as 250-300k is now.

**red92s** · 04-17-2008, 08:23 AM

I turn 26 at the end of the year (late December). By then I will have maxed out my Roth for 2008.

I make significant 401(K) contributions (10%) and get some employer match as well. However, I think it would be hard for the average person of my age (myself included) to hit the $15.5k annual contribution limit. Not impossible, just hard. You are just getting started out in an entry level job (and salary range), many are dealing with the costs of marriages and maybe buying a first home, and likely school loans as well. I certainly couldn't do it without making some significant cuts, and I'm a significantly better saver than many people my own age.

**disneysteve** · 04-17-2008, 08:33 AM

Originally posted by noppenbd View Post

Someone retiring today with a million dollar portfolio, and using the conventional wisdom of withdrawing only 4% a year would have portfolio income of $40K a year (before taxes). Add in some social security and it would probably be enough to live on, but hardly a luxurious retirement.

Assuming 3% annual inflation, 41 years from now in 2049 a retiree with a million dollar portfolio could still withdraw the same $40K a year. However, due to inflation, the spending power of that $40K will have dropped 70% to $12K in 2008 dollars! I doubt many 26 year olds would be able to retire with a million dollar portfolio in 2049.

Bingo. Sure, max out the accounts if you can, but don't think you can stop there. $1 million won't get you far in 2049.

**feh** · 04-17-2008, 09:12 AM

My wife and I started saving seriously at just about that age (we're 42 now), a year or two after we had bought our first house.

Best thing we ever did - we should be able to retire early. But we certainly didn't take the approach that we could invest heavily for 5 years and then just sit on it - we've continued to save as much as we could every year.

The earlier you start, and the more you can put away, the better.

**tripods68** · 04-17-2008, 10:42 AM

Mathematically that is possible. Historically the stock market has average around 10-12% since 1932. So 10% is possible assuming people are comfortable in the ups and down of the market. Chances are most people will eer in the side of caution as they age. That is why is always better starts savings at early age and be consistent no matter how the market perform.

**thegoat** · 04-17-2008, 11:41 AM

I didn't imply to stop putting money into the 401K...I said if it had to stop for a couple of years (you never know, unemployment, sick, etc.).

Just wanted to bring it to people's attention to see what ya'll thought!

I still need to start saving but I'd rather put most of my extra money toward my school debt.

**humandraydel** · 04-17-2008, 02:24 PM

Originally posted by Snodog View Post

But will 1 million be enough? 40 years from now 1 million will probably be worth about the same as 250-300k is now.

This is the key. It's much better to work in current dollars by subtracting an assumed inflation rate from your annual return. Assuming 3% inflation, that means that it would take 13% annual return to reach $1 million current dollars - and that 13% is above historical results.

**ThriftoRama** · 04-17-2008, 04:29 PM

It is an intriguing idea. I think it really is just a good example of how saving early puts time and compound interest on your side.

I would do it, and not sneeze at having a million in 40 years. But I certainly wouldn't stop saving.

The hubster and I try to max out our 401ks, roths, etc. every year, and we are 33 and 35.

**gekkoplus** · 04-19-2008, 09:33 AM

You also have to take into account inflation rise every year and taxes you pay when you take your money back.

Assuming that inflation/COL will rise every year by 3% at least and you may be paying 15% taxes, your portfolio growth each year will be reduced to approx 5.5%. (10 - 3 - 1.5).

This means that for becoming a "real millionaire" you need to save a lot more than what your earn-million-dollars calculator shows.

**zetta** · 04-20-2008, 07:52 AM

I started putting money into my 401k as soon as I was eligible (age 23), and within a couple of years was able to max it out. (At the companies where I worked, the cap was 15% of your salary, so I never reached the $15,500 cap.) I maxed it out for the next 11 years, then took 3 years out of the workforce to be a SAHM. Some years I contributed to my IRA/ROTH as well, other years I didn't out of laziness.

I'm now 37, and according to this calculator:
How Much to Retire?

the current value of my portfolio (mine only, none of DH's) is greater than the amount I'll need to retire at 60 and live to 100, if I get a 10% return. In other words, because I started early, I don't need to contribute another dime!

So yes, I'd say max out your 401k as early as you can!

Savings 1 Million in 1 Year (age 26)