Delayed saving: starting late in life to save for retirement

“The best time to plant an oak tree was 20 years ago … the second best time is today.”

– Chinese proverb

Also, the best time to start saving money for retirement is when you are young. Because when it comes to making compound interest work its magic, timing is the key ingredient.

But what about all those people who don’t have 40 or 50 years left to build a nest of significant savings for retirement?

Well, according to financial expert and author David Bach, it’s never too late to start. “Even if you start late,” writes Bach in his book, Start late; In closing, Rich, “you can still make a pretty respectable amount of money.”

And you don’t have to be earning some kind of mega annual income either. In fact:

“How much you earn has almost no influence on whether or not you can build wealth.”

– David Bach, Start Late; Rich finish

Rather, Bach explains, “it’s not about how much we earn, it’s how much we spend.” And some of that spending can easily be cut by looking at what Bach calls the “Latte factor.” If, for example, you are currently buying a fancy coffee every day for $ 5, and you saved and invested that $ 5 a day instead, you could actually accumulate a small sum of money.

Here are some numbers:

If you save $ 5 a day ($ 150 / month) and get an average return of 10% of your money (compounded annually), then in 10 years, you would have $ 30,727. But in 30 years, you would have $ 339,073.

Now if you double your savings and you can save $ 10 a day ($ 300 / month) and you get an average return of 10% on your money (compounded annually), then in 10 years, you will have $ 61,453. But in 30 years, you would have $ 678,146. Now we’re talking (especially if you live in Canada and put that $ 3,600 a year into a TFSA, since then that money can be withdrawn tax-free).

And let’s say you can afford to save $ 20 per day ($ 600 / month) and get an average return of 10% (compounded annually), then in just 20 years, you’d have $ 455,621. But in 30 years, you would have $ 1,356,293.

Now, of course, the stock market right now doesn’t exactly reflect a 10% rate of return. And you’d be lucky to find a GIC (CD in the US) at 2% these days, let alone 10%. Fair enough. But building wealth through regular saving and prudent investing, regardless of our age, is rarely a quick wealth plan.

Rather, it’s slow and steady wins the race, even if you just started that race in your mid-forties. Because historically, the stock market has provided investors with a decent average return on their money.

According to Observations (a personal finance blog that provides a historical perspective, emphasizes strategic planning, and uses charts and spreadsheets to show how financial things work), between 1900 and 2012, the average / year total return of the Dow Jones Industrial Average It was about 9.4% and that, of course, includes the 1929 crash.

In his blog post, The Historical Rate of Return for the Stock Market Since 1900, Tom DeGrace discusses stock market returns over shorter periods of time. The 1990s, for example, was a phenomenal decade, with an average annual return of 18.17%. The next decade (2000 to 2009) was not so good: 1.07%. But then, in the next three years (2010 to 2013), the average return was 16.74%.

“It is your time in the market that counts, not the timing.”

– Canadian Investment Fund Institute

Unfortunately, David Chilton, in his book The Wealthy Barber Returns, suspects that markets may have more difficult times ahead in the short term. “Looking ahead,” Chilton writes, “we may have to deal with financial markets” slipping away “fighting the winds against excessive public and private debt and consequent slow economic growth.”

I suspect you’re right (but again, that also means that there are, and probably will continue to exist, some tremendous buying opportunities in the markets). According to Stats Canada, personal debt is increasing: Canadians owed nearly $ 1.64 for every dollar of disposable income they earned in the third quarter of 2015. In 1990, this figure was about 90 cents.

And on the subject of personal debt: if you have some type of balance on your credit card and only pay the minimum monthly payments, accumulating some type of wealth is going to be extremely difficult.

Here’s a powerful example from Start Late, Finish Rich:

If you owe $ 10,000 on a credit card and pay only the minimum payment (with an interest rate of 19.98%), it will take you more than 37 years to get out of debt, and before you do, you will have spent almost $ 19,000 in interest charges.

Oh!

“Credit cards allow us to act richer than we are,” explains Chilton in The Wealthy Barber Returns, “and acting rich now makes it difficult to be rich in the future.”

Yes.

So what to do? Well, I think this observation says a lot:

“When I sit down with people who have saved enough throughout their lives, I see three common denominators: 1) They paid themselves first; 2) They started young, or else they made up for it with higher savings rates; and 3) Your Debt – Management followed the “You must not!” Approach.

– David Chilton, Return of the Rich Barber

As for how much needs to be paid, experts suggest that you set aside 10-15% of your gross income, especially if you start late in the game to save.

And if you have significant credit card debt, David Bach suggests that your first step is to call your credit card company and request a lower interest rate. And if they don’t give you a lower rate, find a credit company that will and transfer your balance.

Interestingly, however, Bach DOES NOT suggest that you pay off your debts first and THEN start saving. Rather, it strongly suggests that you do both!

But I think that if a person is worried about their financial future, perhaps the worst thing they can do is … nothing at all. Because it is better to plant a small seed that grows into a small oak tree than to plant no seed at all.