There was a good article over at The Globe and Mail that covered the problem with procrastination quite well. It gave an example of two investors, who contributed money to their investments at different stages of their lives. It is a classic example when investors talk about the time value of money simply because the outcome is so clear. Here is what the article said:
Consider the story of two investors. Ernest has always been a “do-it-now” kind of person. He decided to start saving for retirement at age 30. In fact, Ernest invested $5,000 every year from the age of 30, to age 40, for total contributions to his nest egg of $50,000 ($5,000 each year for 10 years). He then stopped his contributions and allowed the capital to grow from age 40 to age 65. He earned 8 per cent on his portfolio annually. At age 65, Ernest had $496,055 available for retirement.
The second investor in our story is Bertrand, Ernest’s twin brother. Bertrand is a procrastinator. After watching Ernest save for retirement for a few years, he was finally convinced that he should start saving himself.
And so, at age 37, Bertrand started saving $5,000 each year, just as Ernest was doing. Bertrand saved $5,000 each year from age 37 to age 65 — a full 28 years. Bertrand’s total contributions to his retirement savings amounted to $140,000 ($5,000 each year for 28 years). He earned the same 8 per cent as Ernest annually.
How much did Bertrand have available at age 65? Remember, he contributed $140,000 over the years, compared with Ernest’s $50,000. The answer is $476,695.
Did you catch that? Although Bertrand contributed $90,000 more to his retirement savings than Ernest, and both earned the same rate of return, Bertrand ended up with $19,360 less in his portfolio than Ernest. The difference? Time. Ernest’s money was working for him seven years sooner.
The sooner we as investors start the better chances we have of amassing a good sum of money in our later years. However, as with many things in life, it is easier said than done.
Hey DividendGuy!
Do you hold your stocks in tax deferred accounts or a regular taxable account?
How do you buy your stocks? Online Broker or Sharebuilder or direct plans?
I have been wondering the best way to build my portfolio. I have been using my IRA account for dividend stocks but I have been pondering if it would be a good idea to start a regular taxable account to hold some stocks in and hopefully never sell them.
Any answers to these questions would be appreciated.
A little of both – but primarily in my tax deferred account. I love the tax deferral that it provides me. If you have access to an IRA go for it. Just use money you will not need for a long time.
My primary dividend reinvestment account is with the Canadian Shareowner’s Association. They allow fractional share reinvestment.
Thanks,
The Dividend Guy
dividend guy. good article. but who wants to wait until they are 65 to enjoy a half million dollars in the bank. i think you can do it much earlier then that but i understand the time value of money if you invest early. in the military we have the thrift savings plan (TSP). it invests in ishares.com i like the shares there basically ETF funds. i don’t like mutual funds. i basically want to invest $10-20k into at 26 and leave it there just in case my option trading doesn’t bloom and get wiser.
at 26 20k at 65 projects to be around $1million.
but then again with inflation and a big baby boomer crash near 2012 how much will $1mil be worth when i am 26?
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