If you’re looking for a really valuable present for anyone in their 20’s this Christmas you couldn’t go wrong by handing them $50 and explaining the simple dynamics of time and compounding contributions when it comes to planning for the future.
Explain that $50 can be their first contribution, but every $50 from there, each week, over the next 40 years is up to them.
Watch their jaws drop as they try to comprehend the timeline.
While they might scoff at the idea and the supposed effort to keep it up, the $50 can be sold as the lazy way to enjoy a more fruitful future or retirement, in addition to superannuation.
If you assume a 6% annualised return, $200 a month over 40 years amounts to just under $398k which is a decent return for a small amount of money socked away each week. And 6% isn’t exactly outlandish, given a portfolio comprising 50% cash/fixed interest and 50% Australian and International shares returned 10.9% since 1980 according to Vanguard.
Start 10 years later and to achieve a similar outcome ($401k) based on a 6% annualised return, they’ll need to be saving $400 a month.
And while the total contributions at $200 a month over 40 years clock in at $96,000, at $400 a month over 30 years, they clock in at $144,000. That’s a lot more effort involved and it’s more money to be set aside.
Start 20 years later and things start looking a little hairy in reaching that $400k mark. Again, based on a 6% annualised return they need to be putting away $865 a month and over 20 years that’s $207,600 they’ll need in contributions – more than double what’s required over 40 years.
Again that will take more effort and it’s also money that could be used for something else.
The true benefit of the smaller and earlier contributions come with the base they’ve built. If the investor chooses to increase those contributions along the way, their end total will go further ahead of the later starting investor who has contributed more.
This next scenario is for the truly lazy investor because they can save less with the benefit of only contributing for 20 years.
If for the first 10 years the lazy investor contributes $200 a month, then switches to $400 for the next 10 years, they can kick back and stop contributions completely at the 20 year mark because at year 40 their total will be $414k.
The total contribution is $72k; half of what the investor who starts at the 10 year mark contributing $400 a month puts in, but the final total is $13k more. And they were only contributing for 20 years, not 30.
Against the investor who delayed and didn’t start until the 20 year mark this becomes an even better outcome. The contributions required are 34% of those needed by the late starting investor and importantly for the lazy bones, there’s no stress to put more and more away as the clock counts down.
Apparently the youth of today are lazier than ever, so it shouldn’t be hard to sell them on letting their money do all the work for them.
This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your personal investment objectives, financial situation and individual needs.
