Regret has a funny way of sneaking up on you. As a young man I remember being told by coaches, parents, and people much older than me that I needed to cherish every moment of my time while I was in school. I had no clue what they were talking about. Between athletics, countless hours of video games, and tending to my social status at school what wasn’t to cherish? I was cruising through life, satisfied and happy until one day the stuff I screwed up or opportunities I missed out on hit me. At that point there was no turning back to correct things, what was done was done. Was the life I lived up to that point worthless? Absolutely not but I’d be lying if I said I didn’t have any regrets.
I remember my high school basketball coach always screaming at us in the huddle to have no regrets. But as I’ve grown older I realize there’s no such thing as living a life without regrets because everyone makes mistakes. Everyone has something they wish they had done, had done differently, or hadn’t done at all. As I grow older and encounter experiences as a husband, father, and professional I’ve come to the realization that most life lessons have to be lived in order to be understood. I call it the circle of life and the same thing holds true for investors.
Most of your successful investors have learned very hard lessons in the market and it is because of these lessons that they are where they are today. But when I ask an investor what their number one regret is, they almost always say “I wish I had started investing earlier.” Let’s take a look at why the number 1 thing any TSP member should implement in their TSP investment strategy is to invest early.
Compound Interest Case Study
I want to visually show you the action of compounding over time. Please take a look at the chart below. There are 4 different test cases. Each individual invested $1,000 a month for their allotted time period, but each case has a different investment horizon.
Please note how Case 1 invested less money but had a much better return on investment (ROI) at the end of 2012 than any other test case. Why is that? It’s because they started investing money right away and let that money compound over time. Compounding is what happens when your interest keeps earning interest, year after year.
Think of it this way, every year you have your money invested is another opportunity to make even more money. As you can see from the chart above Case 1 invested a total of $240,000 over a 40 year time span but ended up with a greater nest egg than Case 4, this is because Case 4 only invested over a 20 year time span which gave Case 1 twenty extra years for their money to compound.
If you’re still having a tough time understanding then think of it this way. In regards to getting in shape, who has a better chance of changing their body composition, a 20 year old or a 40 year old?
A 20 year old right?! Now I’m not saying a 40 year old cannot change their body composition but it’s simply going to take longer than someone at 20. The metabolism slows down and the body’s production of muscle building hormones decreases as age progresses. Basically the person at 40 is going to be playing catch up. Just like they will be with their investments.
The Retirement Train Wreck Waiting To Happen
The Employee Benefit Research Institute (EBRI) is the largest repository of information regarding individual 401k plan participant accounts. As of Dec 2012, their database included information on 24 million individual 401k accounts which represented over $1.5 trillion in assets.
Each year EBRI conducts a yearly retirement confidence survey which gauges how confident retirees are regarding their ability to retire comfortably. Here are some frightening statistics from their survey:
- Only 17% of retirees have over $250,000 in their retirement accounts
- 36% of the work force reports they have less than $1000 saved for retirement
- Only 57% of workers are saving for retirement
- Only 18% of workers are very confident about their retirement
- 44% of retirees report having a problem with their level of debt
It is imperative that you understand and accept that the owness is on you for ensuring your safe retirement. The days of companies and governments looking out for your retirement by promising pensions are over. Yes, as government and military personnel we are a small percentage of the work force that are still guaranteed a pension but over time I fully expect that to be phased out. Just look at FERS compared to CSRS!
Based on the data above you don’t need me to tell you that retirees are facing a huge financial epidemic. Quite frankly the economical consequences stemming from their failure to adequately save for retirement will be a huge burden to our country. I will save the rest of my opinion for a future article but I think we can all agree this isn’t going to end well.
TSP Investment Strategy
A lot of people understand the basic theory of investing early but most people do not think pass that. They hear “Start investing early and you will have a nest egg worth $1 million dollars by the end of retirement.” That couldn’t be any further from the truth. A mentor of mine once told me “The things that come easy are often the wrong thing and the things that come with a struggle are often the most rewarding.
Yes the first step towards building a hefty nest egg towards retirement is investing and investing early, but it doesn’t stop there. Your money doesn’t just come out of your paycheck and start building day after day.
The stock market has bull markets and bear markets, in short it rises and it falls. These are natural cycles and are 100% unavoidable. Conventional wisdom suggests that you simply ignore the market and blindly invest your money month after month, year after year without ever checking in on it. Stop for a minute, does that really sound like a good idea to you? Why in the world would you be so lazy with your life savings?
My parting advice to you would be to get a basic education in investing. You don’t have to be an expert but make it worth your time to learn. Obviously we would love for you to get that education here but no matter what you choose make sure that you educate yourself. This is your life savings we’re talking about. Don’t give the rights away so carelessly.
At this stage in life, you probably have a lot of competing financial priorities. You might be paying off debt, saving for a first home, or starting a business or a family. Still, the advantages of saving towards retirement early, while balancing your other goals, cannot be overstated.
You have to remember the overall problem with investing early is called self-control bias, it’s a behavioral finance term. It describes the common situation where people fail to pursue long-term goals due to a lack of self-discipline. Workers know logically that they need to save more for retirement, but they struggle to forgo present consumption. Consider Warren Buffett’s simple definition of investment: “Investing is forgoing consumption now in order to have the ability to consume more at a later date.”