I read an article today where a financial advisor made the following statement:
“If you start early you will be so much further ahead. Then they use this example – A person age 25 who invests a fixed amount each month for 10 years and then stops, will be ahead of a person who starts at 35 and invests for the same amount each month for the rest of his life.”
I know you talk about Pop Culture Finance and how the industry wants you to believe everything is black and white. Having said that, what is wrong with that statement?
There is a lot wrong with that statement. In theory and in a world where investment returns are predictable and constant, on paper you can make that math work. However, we live in a world where change is constant and nothing is predictable. Pop Culture Finance leaves out so many of the details. They want you to believe that saving early and saving a percentage of your income almost guarantees a strong retirement.
Success in retirement goes well beyond being a good saver who starts early. To be successful, you have to master the following process:
(1) Have a Plan – No where you are and know where you are going. Without a plan, it is a meaningless endeavor
(2) Save the percentage of your income that your plan says you need to meet your goals
(3) Have a Plan A and a Plan B Investment strategy – To be successful you have to become a good manager of risk. Pop Culture Finance manages risk primarily by telling you to ride out the bad times because the market always comes back.
(4) Track your progress – You have to know how you are doing in comparison to your goals!
I would put my money on the 35-year old being ahead after a matter of time if he or she were working the process versus the 25-year old listening to Pop Culture Finance Principles.
Remember there is only one absolute truth when it comes to money. There are no absolute truths!
If you have a question for Bob, send it in here – http://www.prudentmoney.com/ask-bob/
Bob Brooks is host of the Prudent Money Radio Show. He is also a financial advisor who has been working with clients for almost 25 years.