Your Golden Goose: Time in the market

It can be hard to conceptualize what your retirement savings will look like when you are still in your twenties, thirties, or forties – your late sixties and seventies are still a few decades away and you feel comfortable putting off these savings until next year or the year after that. That is, until you understand that your greatest asset as an investor is time.

As an entrepreneur, you may have learned the hard way that good things take time. But more often than not, if you’re persistent, the outcome is worth the wait.

This same principal can be applied to investing: Building a solid foundation to grow your wealth takes time, but if you’re persistent [about saving and contributing to your investment account], you’re likely to achieve your desired outcome. Given adequate time, you will not have to worry about achieving unrealistic benchmarks to reach your goals.

What happens when you don’t give yourself adequate time in the market?

Here’s the reality: The longer you wait to start building your retirement account, the harder it will be to reach your goals and you may find yourself hoping for unrealistic returns from your investments.

Lack of time and a need to out-perform the market year over year is a risky combination. For example, if you wait until you’re 50 to start investing, you could find yourself hoping for an 18% return in a 10% market. Furthermore, a limited timeframe can result in an investor’s inability to tolerate volatility in the market. In short, you may feel pressured to withdraw your funds at an inopportune time.

To show the value of time in the market, we’ve broken it down using a hypothetical scenario.

Let’s say your goal is to retire with 2 million dollars by the time you’re 70 years old and your financial picture looks like this:

You begin your career at age 25 with an annual salary of $70,000. Your salary increases 2.5% each year during your career and you’re making $206,000 annually when you retire at age 70. If you put 10% of your income away each year into a savings account with zero interest, you would retire with around $570, 000. If you save the same amount each year but instead put it into an investment account with an average annual return of 6%, you would retire with your goal of 2 million dollars.

Assuming an average annual return of 6% over the course of 45 years is actually a conservative assumption. Historically, a multi-asset portfolio consisting of 40% large-capitalization U.S. stocks, 25% small-cap U.S. stocks, 25% U.S. bonds and 10% U.S. cash has never experienced a 45-year annualized return of less than 7.7%[1]. And between the years of 1926-2016, the average 45-year annualized return of a multi-asset portfolio was 10.2%.

It’s important to keep these numbers in mind as we analyze what kind of return you would need if you wait too long to start investing.

Let’s say you wait until you’re 50 to start investing 10% of your income annually; with this compressed timeframe, you’ll need an 18% annualized return to realize your goal of a 2 million dollar nest egg by age 70. If you wait just five years more, and start investing 10% of your income at age 55, you’ll need a whopping 27% return to realize your goal. And we wouldn’t count on it.

In short, reaping the full benefits of the market requires time. Time allows your money to grow, compound, and compound again. Time also allows you to withstand periods of volatility – so you are never forced to pull your money out of the market during an inopportune cycle. The savings part, however, is up to you.

[1] June 2017, Craig L. Iraelsen, Use a crockpot, not a microwave, Portfolio, Financial-Planning.com.