How low-earning recent grads to high-earning established professionals can save money to retire comfortably, according to a wealth manager
One of my favorite things as a money manager and financial advisor is helping my peers with their finances. Between the pandemic and a seemingly ever-increasing cost of living, it’s easy to get discouraged and think acquiring wealth is impossible.
But hear me out: there are plenty of ways to build yourself an investment portfolio and pave the way to a multimillion-dollar retirement by starting small today.
The good news is, according to a survey done by Betterment for Business, 88% of millennials and Gen Z’ers are actively saving money. However, the same study also found that 77% of those surveyed said that finances cause them stress.
Financial planning often seems more complicated than it really is, and it doesn’t need to be complicated.
The first step to creating a simple and successful financial plan is to assess your current financial picture by answering three basic questions:
1. How much do I have now? (For this exercise, figure out your overall net worth including cars, home, etc. as well as your liquid net worth which only includes assets that can be easily spent or converted to cash, i.e., cash and investment accounts)
2. How much am I currently bringing in after taxes? (Income)
3. Where is my money going? (Expenses: There are several apps that can be used to help track your income and spending)
Knowing the answers to these questions are imperative before structuring your financial plan and investment strategy. So, answer the questions and then run through the scenarios below. For the sake of simplicity, all figures written are after-taxes.
If you’re saving as a college student or recent grad:
Spencer is 22 years old, recently graduated from college, and landed his first job as a project manager earning $3,000 a month ($36,000 a year). Like most recent grads, Spencer hasn’t accumulated much wealth, but he’s living frugally and is able to keep all of his expenses to $2,500 a month, leaving him $500 a month to save and invest.
People who save money and have cash savings built up report better overall wellbeing and less psychological distress, so the first thing Spencer needs to do is build up a savings cushion.
I recommend having two months of living expenses put aside, or in Spencer’s case, $5,000. This will take some time to accumulate — 10 months to be exact, if he keeps up his current standard of living — but trust me, it’ll make him a better investor down the line. A cash cushion will also help Spencer feel more secure when investing because he has a safety net if something goes wrong. This will lead to less emotional investing.
Once Spencer has some savings built up, he can start to have some fun: Index funds are the next step for the vast majority of people, unless they’re willing to put in — at a minimum — several hours per week dedicated to stock research.
With two months of expenses ($5,000) put away in cash savings, Spencer can start throwing that extra $500 a month into index funds. Since he’s younger and has a long time horizon, he can handle greater risk, so I’d concentrate mostly on accumulating shares of S&P 500 and Nasdaq funds.
To purchase these funds and other stocks, you’ll need to set up a brokerage account. I recommend Fidelity Investments or TD Ameritrade, I work very closely with both of these brokerage firms and love them. You can easily open an account by visiting their websites and clicking “open new account” in the top right corner at TD, or the top left corner at Fidelity. I like Fidelity for their service and educational resources and TD Ameritrade for their mobile app and technology. It’s up to you to decide which is most important to you. Whichever you choose, both of these brokerages have very friendly and helpful customer service reps that are available by phone, 24/7, which is a great benefit.
Now, let’s plug Spencer’s figures into a compound interest calculator to see what we get:
Starting amount: $0 (it’s a new investment account)
Years to save: 40 (he’ll be 66 and ready to retire)
Rate of Return: 11%
Additional Contributions: $500 – frequency set to monthly since he’s depositing $500 every month
Interest: Compound annually
The result? Spencer will have almost $3.7 million to retire when he is 66 years old. BOOM!
If you’re a young professional advancing in your career:
Kenzie is 28 and just landed herself a job at a publicly traded tech company and is earning $10k per month after taxes ($120,000 a year). She sticks to a tight budget and keeps all of her expenses below $6,000 a month leaving her $4,000 to save and invest.
Two months’ worth of living expenses for Kenzie is $12k, so it’ll take her three months to build that up. After that, she should begin investing.
Kenzie has a unique situation with her career; she loves the company she works for and believes they have strong potential to outperform their competitors. She can also purchase company shares at a discount. Kenzie decides to invest $3,000 a month into index funds and the other $1,000 into her company stock.
Let’s run the numbers now for Kenzie, but let’s assume she’s correct in that her company does outperform the averages, so her annual return comes to 13%:
Starting amount: $0
Years to save: 25
Rate of Return: 13%
Additional Contributions: $4,000 – frequency set to monthly
Interest: Compound annually
Kenzie will have nearly $8 million dollars put away for retirement by the time she is 47. If she wanted, she could easily retire early.
If you’re an established professional well into your career:
Joe and Janaie are married, in their late thirties, and both work as doctors bringing home $30k per month after taxes ($360,000 a year). After supporting two kids, paying a mortgage, student loans, and their other financial obligations, Joe and Janaie have $10k per month they can allocate to their investments.
Since both of them are well into their careers, they already have $50,000 in cash savings and $400,000 in their joint investment accounts. As a couple, they earn more than $300,000 per year, so they qualify as accredited investors.
Accredited investors are wealthy and can afford greater risk, so they have access to other types of investments that are seen as too risky for most investors. Joe is currently working with a team developing a medical device and decides to take $100,000 to invest in the new technology. He’s hoping it’ll be purchased by a large medical device company in a few years, but until then, his money will be locked into the investment.
Since the pandemic, most of Janaie’s clients have seen her via an onlineplatform. Janaie loves the technology and decides to buy $100,000 worth of shares in the telehealth company she works with in hopes they IPO within the next year. If the company goes public, she can sell her shares on the open market hopefully for a large gain.
Even with these two new investments, they still have a high income and $200k in their investment account. They can afford the risk.
Sadly, Joe’s device never made it off the ground and so he lost his $100,000 investment, but Janaie’s telehealth investment rose by 900% and had a successful IPO a year later netting them $1,000,000.
Over the course of the year, they also saved an additional $120,000 and their investments appreciated by 10%, giving them $1,350,000 by the time they both turn 40. At this point, they decide they will simply invest their money into index funds at an average return of 11% until they retire at 65.
Starting amount: $1,350,000
Years to save: 25
Rate of Return: 11%
Additional Contributions: $10,000 – frequency set to monthly
Interest: Compound annually
If Joe and Janaie keep this up for another 25 years, they will have nearly $33 million dollars by the time they retire.
Now, the one thing these scenarios don’t take into consideration is capital gains taxes, but those only apply if you sell your shares. This is another reason the “buy and hold” method is so powerful; you’ll save a fortune on taxes as opposed to those who frequently trade in and out of their shares. If they hold on, they will be set up for a very profitable future.
The key theme in all three of these scenarios is consistency. Even investing only $100 a month will earn you $740k in 40 years if you get average returns. Too many people are looking for a quick investment in order to get rich by the end of the month. Sure, that could happen, and we all know someone who made crazy money seemingly overnight, but more often than not you’re going to be worse off than if you just tried to be “average.”
Trust me, being rich at 50 is going to feel just as good as it would at 25. Play the odds in your favor and take the long-term approach. Many young people think they need to be making a lot in order to accumulate a lot, but your greatest advantage is time. Start small today and stay consistent or you will definitely need to earn a lot years down the road to make up for lost time.
Briton Hill is a wealth manager, investor, and the president and a partner at Weber Global Management.