“Who will end up with the most money at retirement?”

David understands the value of time and the importance of saving. He gets a job at age 16. Each year, he saves $2,000 – not an unrealistic amount of money for an enterprising 16 year old to earn, while still having plenty of money for current spending.

Saving $2,000 per year becomes a habit, and David does it every year. Even after he begins his career in his mid-20s, he simply continues to set aside $2,000 per year. He invests these savings in a conservative way. He opens an RSP account so his investments won’t be taxed. He puts 45% of his savings into short-term, highly rated corporate bonds. He puts 45% of his savings into high-quality “dividend growing” stocks. And he puts 10% into gold. Simple.

His portfolio only produces modest returns. Over time, he earns about 8% a year – mostly by reinvesting his dividends and interest payments. He’s not worried about getting “rich.” He’s just saving his money. And it’s easy because he never saves more than $2,000 a year. He has plenty of money to spend on things he needs and wants – but he always remembers to save first.

By the time he’s 40 years old, he’s contributed $48,000 in savings to his portfolio. At that point, he calculates that if he continues to earn 8% a year on this portfolio and reinvest all of his dividends and interest, he’ll have plenty of money for retirement at 65 years old. So at age 40, David stops saving money. He’s now free to spend all the money he makes for the rest of his life.

Jonathan doesn’t learn to save as a child and doesn’t even get a job until after college. By that time, he’s so busy buying things – cars, vacations, dinners at nice restaurants, clothes, houses, etc., he never can “afford” to save a dime.

He wakes up at age 40 and realizes he doesn’t have anything in the way of a retirement fund or really any liquid savings at all. So he begins to save, and he does a great job. He’s putting away $10,000 per year, every year. He knows he’s got to play “catch-up.” Like David, he invests conservatively and earns 8% a year. He reinvests everything, like David. By the time he turns 65 years old, Jonathan has contributed $250,000 towards his retirement.

Guess who has a bigger portfolio at age 65? Is it David who never contributed more than $2,000 per year and whose savings totaled $48,000 in his lifetime… or is it Jonathan, who saved more than five times as much money initially?




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