By: Tom Kirk
An Avoidable Financial Trap
You’re in your mid-forties, having labored for about half your working life. But when you look at what you have saved so far it is nowhere close to the amount you think you will need when you retire. You want to save more, but you still have college educations, weddings and debts to pay down that don’t allow you to increase what you are putting into your 401(k) or other investment accounts.
So you decide the only way to catch up is to take more risk with your investments, like putting it all into real estate or tech stocks or bit coins. But when the bottom falls out of these parts of the market (like it always does eventually) you are instead left with less than you started.
Your vision of your financial future is forever changed and you wonder if you will ever be able to retire. This has happened to many people. Maybe it has even happened to you.
This regrettable situation is partially the result of comparing the linear passage of time with the exponential growth of money. This misconception is understandable because at first money grows linearly, fueled primarily by your contributions, which tend to be the same amount every year. Many people have not fallen behind, they may be on track or further ahead than they think. Here’s why.
The table below is an example which shows the result of saving $10,000 per year and earning 8 percent* annually. After five years you only have a little more than the sum of your contributions. This is linear growth.
But look at what happens in year 10. The earnings on the pile of money are roughly equal to your annual contribution. This is a turning point. Because by year 20 (age 44), the earnings alone are three times what you contribute that year. By year 30 they are 8 times what you contribute and by year 40 they are 19 times what you contribute. That is exponential growth!
When you are equipped with this knowledge and its impact on your financial life you are more likely to make smart decisions about your money.
Since our clients have a written financial plan, which includes a future wealth projection, they are confident that if they stay the course they will likely catch up and in some cases surpass the amount of money they will need in retirement without the need to take undue risks with their wealth.
Do you know where you are on your path to financial freedom? Wouldn’t it be nice to know this and what you must do to make your vision of your financial future a reality? Let us know if you think we can help. Don’t get caught in this financial trap.
Tom Kirk, author of “Are You Worried About Your Money?” and
President and Chief Executive Officer of FirstWave Financial.