I get asked quite frequently “How do I build wealth at any age?” … and then they add a specific age. My initial response is usually the same regardless of the age of the person asking the question or when they might be considering retiring.
My response outlines a basic strategy that includes development of (1) a strong money mindset, (2) a specific financial blueprint and (3) the creation of a side hustle. (I outlined this strategy in following post https://thefinancialstoic.com/?p=73 where I go into detail on the individual tactics within each of these three identified elements.)
For the most part, this strategy is steeped in the principles behind wealth building, essentially what should be the ‘operating system’ that an individual would adopt if they wanted to build wealth. I don’t find this strategy, or any of the elements that make it up, to be profound or to be experimental.
In fact, they are principles that I have observed, learned and practiced myself over the better part of what’s now closing in on 30 years of working with entrepreneurs and individuals who committed themselves to building wealth. And they work.
Wealth Building Strategy
Even though I firmly believe that the blueprint to building wealth at any age is based upon these three structural activities, I do recognize that there are other variables that are part of building wealth.
More specifically, (1) time, (2) amount of resources invested and (3) the rate of return on those invested resources play a very large part in wealth building. In fact, these three variables have everything to do with how much wealth can be created within a specific amount of time.
These elements alone, or at least time and the amount of resources that an individual has to invest, are a direct reflection of following the wealth building strategy that I outline. Obviously the rate of return that is available at any given time is not something that is within control of the wealth builder.
That said, however, an individual who is committed to following the wealth building strategy laid out in https://thefinancialstoic.com/?p=73 as soon as possible is going to take advantage of ‘time in the market’ versus following the losing strategy of ‘timing the market’.
In addition, if they follow the wealth building strategy and the described tactics they will undoubtedly have a specific amount of resources available to invest. They will now have 2 out of the 3 elements of wealth building under control.
Rate of Return
As for that third element, rate of return, let’s see if there’s a way to ‘control’ that one as much as we can with what we CAN control. Now clearly we don’t have any ability to control what the rate of return is on any specific investment or asset. That’s an obvious statement.
BUT…as we previously discussed, we DO have the ability to control when we start investing to build wealth (time) and how much we accumulate in available funds to invest (amount of resources invested). How does this have any impact on the third element, rate of return on invested resources? Interestingly enough, a lot.
Let’s take into account someone who has started out on their wealth building journey by investing $1,956 a month, each and every month, over 20 years; from 40 years old until they reach 60 years of age.
Let’s also assume they make a consistent 7 percent interest on their invested amount over this 20 years. When they reach 60 years of age they will have accumulated approximately $1,000,000 dollars in their retirement account.
The Magic of Compound Interest
Now here’s where the magic of compounding interest applied over ‘time in market’ does in fact contest or at least ‘cover’ an otherwise more advantaged rate of return.
For example, let’s take that same individual who invests $1,956 a month but assume that they invest starting at age 50 for 10 years until age 60. In order for this individual to accumulate $1,000,000 they would need a rate of return of no less than 27.5% annually!
Now clearly not only is that highly improbable, it is more than likely impossible. That is why it is crucial to have as much time in the market as possible in order to lower the amount needed to invest or for the need of an unusually high rate of return. This is the compound interest effect in action.
On the other hand, if they were relegated to only a 7% rate of return like their ‘younger self’ that same individual would have to invest $5,780 every month over those 10 years.
That would mean that that individual would need to invest approximately 2 and a half times more than their younger self; a total of $69,360 a year from after tax dollars. Again, very difficult or highly improbable for most individuals to be able to do.
Time in Market AND Amount Invested
The point of the above exercise is to show how rate of return really isn’t the salvation that many out there would like people to believe it is relative to building wealth. It IS important of course but not the salvation. The takeaway is that time in the market and ability to invest a reasonable amount of money on a monthly basis, regardless of the rate of return, is a reliable and very doable strategy for building wealth.
Now obviously, the individual who is able to start investing early, can put more resources into investments and which provide a higher rate of return, are going to build more wealth and at a quicker rate. That’s simply the dynamic of how compound interest and time work with one another.
However, when looking at these wealth building ingredients the two irreplaceable ones, and the corner stones of building wealth, are time in the market and having a reasonable amount of resources to invest.
Now, let’s use this explanation of how to build wealth and the essential ingredients for doing it and go back and answer the question “How do I build wealth at 20, 30, 40 or 50 years old?”.
Even though there are many different levels of what needs to be done at each of these ages, the reality is that the “how” is exactly the same regardless of the age. More specifically, (1) a strong money mindset, (2) a specific financial blueprint and (3) the creation of a side hustle.
Time cannot be understated as a variable for building Wealth
However, the ‘ingredients’ of time, amount to invest and rate of return are definitely going to put their own flavor on the efforts that need to be taken.
That said, the importance of time as a variable can’t be understated because of the compounding interest effect and how it is able to compensate for a less than impressive amount of money invested or rate of return. In most wealth building scenarios, time really is the equalizer.
To that end, as time starts to get reduced (going from a starting point of 20 years old to 30, to 40, to 50) the dynamics of the formula changes significantly. That same person now would need to have a lot more money invested or would need to make a much more significant rate of return. More than likely, both.
Given these two remaining wealth building ingredients, amount to invest and rate of return, I am of the school of thought that believes that there are very few ‘safe ways’ to increase your rate of return.
Although it certainly isn’t easy to get your hands on more money to invest (although we’re going to talk about that process extensively in future posts), in my humble opinion it’s easier to do this than to positively change your rate of return. Therefore, as time starts to decrease you’re going to need to make and invest a substantial amount more money than you would have had to if you had more time.
Let’s take a look at how these three wealth building ingredients work in more of the extreme example of a 20 year old. As previously indicated, someone in their early 20’s obviously has the complete advantage of time and doesn’t necessarily have to invest a substantial amount of money or have an impressive rate of return and they will STILL build wealth if they follow the basic strategies.
How to build Wealth as a 20 year old…quite easily actually
So let’s say for example that our 20 year old was able to put $1,956 away monthly in an investment with a 7% rate of return for 40 years (retiring at 60 years old), they would accumulate $4.86 million dollars by the age of 60! This level of significant wealth was built with what could be argued wasn’t a great deal of monthly investment nor a significant rate of return.
However, if our 20 year old wanted to just match the $1,000,000 accumulated by our first investor by age 60, they would simply need to put $1,000 each month in an investment receiving just 3.4% annually to accumulate that amount (not taking into account the impact of inflation). Conversely, just $405 invested each month at a 7% rate of return over 40 years would get them roughly $1,000,000.
So when you’re 20 years old and plan on retiring at the age of 60 years old with a $1,000,000 retirement account, and not accounting for any social security benefits that have been accumulated, in my opinion you can get there with a pretty low lift effort.
In fact, you would simply need to invest $12,000 a year at a 7% rate of return. You could get there quite easily from a pretty average salary and without having to take any unusual investment risk.
If as a 20 year old you’re okay with taking 40 years to retire you have a lot of options that are equally as viable to get you there. However, it’s when you reduce the time frame in which you would like to retire that the strategy for building wealth changes.
As has been previously mentioned, the less time an individual has to build wealth, two variables have to change significantly; the more money that needs to be invested and the larger the rate of return that money needs to generate.
The difficulty of building wealth as a 50 year old
It will not be much of a surprise that on the other extreme as a 50 year old the ability to build a retirement account from scratch that reaches $1,000,000 by the age of 60 is virtually impossible, unless of course that our 50 year old is making an astronomical annual income.
For example, to accumulate $1,000,000 in 10 years you’d need to invest $5,800 a month at 7% rate of return to get there. That’s $69,600 annually of after tax income that is needed to invest.
I dare say that would be significantly difficult for most individuals to be able to do. In addition, $1,000,000 only provides a total of $40,000 annually subscribing to the 4% annual withdrawal rule. Clearly those individuals or families that need more than $40,000 annually in retirement would obviously need to invest substantially more.
Conclusion
So the ultimate takeaway from this post is this; there really isn’t much that can replace having the most time you can have in the market in order to build wealth. This literally diminishes the need for high levels of investments and high rates of returns.
The difficulty with this approach is when someone either starts extremely late in their life to build wealth, say at or after 50 years of age, or if an individual at any age wants to retire extremely early, say within 10 years from starting to build wealth.
The answer to that question, “How do I retire in 10 years?”, is going to take a bit more digging into and the next post to do it!
