Young folks entering the workplace face a mountain of new financial scenarios in rapid succession. For the first time in their lives, real paychecks start rolling in. Sweet! But simultaneously, real bills start showing up. Lame! Student loans, first cars, apartments and houses. Dining out, utilities, groceries, memberships. There is no shortage of opportunities to spend this new money–some opportunities good, and some not so much. Despite all of these expenses, it turns out that your younger years are also the ** the best ** time to start investing in your retirement.

I know it’s lame–what 22-year old wants to plan for being 60? But I hope that the following math (did this article just get *more* lame?) will convince you. This post contains a lot of numbers, so let me know if you have any questions.

First, we have to think about how long a typical career might be. I’m going to assume that our average worker, Wallace, enters the workforce at 22, and retires at 62. That’s **40 years** of solid work.

Next, we have to think about Wallace’s retirement account, and how it grows. Some years will be great for Wallace–the stock market will boom, and Wallace’s investments will bloom. Other years will be bad–a bear market, sad Wallace. Over time, historical data tells us that the market averages out in a positive way–the booms and busts average to a rate of return of **6% per year ** for Wallace. *At the end of the article, I’ll play around with this 6% assumption.*

The money he invests in Year 0 will have 40 years to grow at 6% per year. The money he invests in Year 1 will have 39 years to grow. Year 20 money will have 20 years of growth, and so on. Well, how much more does the Year 1 money grow than the Year 2 money? …than the Year 5 money? …than the Year 20 money? If Wallace doesn’t invest in his 20s–Years 1 through 8–how much of an opportunity for growth did he lose?

The answer to these questions deals with *compound interest*, or the idea that your money grows, and then the new growth grows, and then the growth’s growth grows. It’s like a tree; every new branch (growth) then sprouts off it’s own new branches.

Wallace’s Year 0 money grows 40 times, 6% each time. You might be tempted to think: 40 growths * 6% = 240% increase. But that’s not quite right. Instead, you should take 6% growth (or 1.06) and *raise it to the power of 40*, or 1.06^{40 }= 10.28, or **1028%**. Whoa! Wallace’s Year 0 investment will grow by a factor of 10 before he retires.

Let’s do the same thing for Years 10, 20, 30

Wallace’s Age | Years until retirement | Math | Growth Factor |

22 | 40 | 1.06^{40} | 10.28 |

32 | 30 | 1.06^{30} | 5.74 |

42 | 20 | 1.06^{20} | 3.21 |

52 | 10 | 1.06^{10} | 1.79 |

The money Wallace invests at age 22 will grow almost twice as much as the money he invests at 32, and almost 6 times as much as the money he invests at 52. Crazy.

Here’s another way to approach this question. If we add up the growth factors for age 22, 23, 24 etc., and then do the same counting down from 62, 61, 60 etc., we should find a point where we can say, “The first X years of Wallace’s investment life are equally important as the final Y years.” Turns out, that point occurs for Wallace after **Year 10**. The first 10 years have the same growth potential as the final 30 years.

Whoa. Wallace could invest $10K a year from age 22 to age 32 and *never invest again*, and he’d end up with the same amount of money as another person who invests $10K a year from age 32 to age 62. Wallace invests $100K over 10 years, the other person invest $300K over 30 years, but they reach age 62 with the same amount of money. *That’s how important your early investing years are**. *

I know it’s hard to invest early in life. All we want to do in pay off some debt, drive a decent car, have a roof over our head, and what the heck is wrong with having a little fun?! We finally have the spending power we wished we had as kids. But keep in mind how valuable the early years can be to your retirement.

“Damn JC, I’m 40 and this post has me depressed. I missed out on investing in my 20s and 30s, and now I’m filled with regret.” Stop! Don’t worry about it. The past is immutable, and there is no time like the present. Keep in mind that, for Wallace, age 42 is 80% more important than age 52, and age 52 is 80% more important than age 62. Plus, at age 40, you are likely in a more stable financial position than you were at age 22. Simply put, it’s hard to cover all the financial bases early in life, *and then invest on top of that*. The important takeaway, though, is: **if you can afford to invest, there is absolutely no time like the present**.

**Addendum**: Some might argue that by base assumptions here are wrong. They would say that a 6% average growth rate is too optimistic, and that year-to-year variations (sometimes the market is great, sometimes terrible) need to be accounted for.

So I wrote a little simulation (using software called **MATLAB**). I took Wallace’s scenario and, rather than using 6% every year, I randomly assigned a growth rate between (-10%) and +22% each year of his career. Then, I ran Wallace through 100,000 simulated careers. Sometimes the stars randomly aligned and Wallace had a terrific 40-year period in the market. But on the other side, some of the simulations saw abysmal returns for Wallace.

To appease the financially conservative reader, I now present you with the **5th percentile** result of this simulation. 5,000 of the simulations were worse than this result, but 95,000 of the simulations were better. It’s possible that a real career would go this way, but it would take some pretty bad luck. But hey, we’re here to prepare for bad scenarios.

Scenario | Year 1 Growth | Career Avg Growth | $ at Retirement |

“Stable”/average scenario | 1029% | 6.0% | $1.65 million |

5th percentile scenario | 355% | 3.19% | $0.82 million |

So, yes, it makes a big difference! Bad Luck Wallace ends up with 2x less money than average Wallace. I absolutely would support someone planning for their financial future using “Bad Luck” numbers. Hope for the best, but prepare for the worst.

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