Would You Rather Have $4000 Now or $1.6 Million in 38 Years?
Let’s say you just graduated from college and got a decent job. You have a little extra cash on hand after taxes and are wondering if you should buy a big screen TV or save for retirement. You’re probably going to buy the big screen because that’ll allow you to have an incredible Super Bowl Sunday, but due to your nagging parents, you realize that having some savings is pretty important. What should you do?
Well, ask yourself this question: would you rather have $4000 now or $1.6 million in 38 years?
Seriously, $1.6 million.
Let’s make some assumptions:
- You just graduated from college and are 22 years old.
- You will start withdrawing money from your Roth IRA at 60 years old (the earliest without penalty is 59 1/2).
- Your money grows at 10% per year, which is not at all impossible given 38 years of semi-risky growth.
- You contribute $4000 per year to your Roth (the maximum allowed amount is going up in the future!).
Well, if you do all those things, then you will have $1.6 million in tax-free money at the age of 60. That’s pretty freaking awesome! For $1.6 million, you can easily forget that you’re old—just buy a new hip and splurge a little on that cute 22-year-old tart who doesn’t know enough to save money but who looks incredible to your sexagenarian eyes. If you can hold out until the age of 65, then you’ll have $2.6 million in tax-free money. That’s freaking incredible! Thanks to compounding interest and good saving, you’ve become a millionaire while working a crappy 9-5 job and you probably won’t have to work another day of your miserable life.
Don’t believe me? Download this Excel spreadsheet and put the numbers in yourself. You can easily adjust your annual contribution and growth rate. You can even make the model more complicated if you want. See what happens if you only contribute $2000 a year (you still become a millionaire) or your money only grows at 7% per year (you still become a millionaire).
What are you waiting for? You still have until Tax Day to make your contribution for the previous year, and the earlier you do it, the longer your money can grow! Yeah, saving isn’t exactly on most people’s minds at the age of 22 (trust me, I know as a 25-year-old who looks like a teenager), but it really pays off!
