Saturday, December 5, 2009

The Magical Power of Time and Compounding

This is a really powerful story that blew my mind when I first heard it called "The Sam and Sarah Story". It is about twins, age 22, who both decided to fund their Roth IRAs, for their retirement “Nest Egg.”

It starts off this way: Although Sam had good intentions, he waited for 6 years before actually starting to fund his Roth IRA. He kept saying: “Now next year I’ll get started.” He did that for 6 years. When he finally saw, at the end of the 6th year, that his twin sister had already invested over $28,000.00, he said: “That’s it, I’m starting now!” And for the next 37 years, he invested $400.00 every month, until he reached age 65.
Click to Enlarge Image
By the way, in the Figure above, you can see that each green block represents 1 year of investing $400.00 per month. And, that each white block represents 1 year of investing nothing each month. The reason that we are using $400.00 is because it is a nice round number. The IRA maximum this year would be around $416.00 per month for people under the age of 50 and around $500.00 per month for people over 50.

Now back to the story. Sarah, being very disciplined and focused, immediately started investing $400.00 per month. And, she continued investing for 6 full years until she got married and then she all of a sudden stopped. She never invested another penny for the remaining 37 years -- to age 65. So, as you can see, Sarah only invested a total of $28,800.00 from age 22 to 65. Sam, although he was slow at getting started, invested over $177,000.00 over the same period -- from age 22 to 65.

Which Nest Egg do you think most people would choose?

Well...assuming a 12% return on investment Sam ended up with $3,309,805.00, while Sarah making the same 12% return on investment ended up with $3,507,997.00! Now isn’t that surprising? They both got great results, but who would have ever thought that, over a 43 year period of time, from age 22 to 65, Sam -- who invested over 6 times more money than Sarah -- would end up with $200,000.00 less at retirement? That’s why we at The ProMagnum Group say: “If you don’t know the rules of a game your playing, not only will you not win the game, but you probably won’t have fun playing the game. And, the “Money Game” is just as much of a game as football, tennis, or golf. In fact, we believe it’s more important than any other game -- because it’s a game everyone has got to play, whether they want to, or not!”

There are two very important points to be understood from this story.
  1. If Sam would have started investing at the beginning, like his twin sister Sarah, and continued to age 65 -- he would have had Sam’s $3,309,805.00 plus Sarah’s $3,507,997.00 at age 65. In other words, it cost Sam over $3,500,000.00 because he waited 6 years before starting to invest. That’s the magical power of Time & Compounding!
  2. The last point I want to mention is: Using the particulars in this story, the money invested over the first 6 years contributes more to the “Final Nest Egg Value” than all the money invested over the last 37 years!
Would you agree that this is a most valuable retirement concept?

I'm so excited to share this information with you. If you have enjoyed the information or feel that it would benefit someone else, please share it. If you have any questions or comments, please feel free to contact me.
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