Millennial Magic: Compounding Your Way to $1 Million!

You have something I don’t

I’ll just say it. I’m envious of those of you 10, 20, 30 years younger than me for one reason (and it’s not that you can rock those partially-shaved Brooklyn-hipster haircuts or mostly-ripped jeans, for which my mom would have ironed on one of those gaudy patches from the inside after I would come home from a mean game of Kick The Can, which is not an app but an actual outdoor thing).

It’s that you have something I used to have, that I’ve since traded away.

And it can be absolutely crucial if you ever hope to have $1 million.

It’s time.

And when they say “youth is wasted on the young”, I truly believe this includes, for so many people, a failure to appreciate what time can do for your future.

At least I’ve managed to “trade” time for money, and you can too.

Since time will be consumed in days, months, years at a seemingly blistering pace whether you want it to or not, it’s best to at least get something for it.

Also, if you are just starting to find your way through the thicket of saving and investing, this post is way too important to mess around with. So the irreverent links to coffee places and alt rock music will NOT be featured until much later. Apologies, but also kind of sad if that’s the main reason you check in on this site.

Stated as a riddle:

What tool do you possess that can change your life forever, whose strength decreases the longer you wait to utilize it, and most importantly, is MANY TIMES easier to obtain earlier in life but dissipates into a mealy mush of nothingness later on?

You know it, you need to embrace it … The Magic of Compounding

How can I drive home how to best grasp the magnitude of this concept? I’ll try to demonstrate it in a few ways shortly.

And Don’t Let Them Tell You $1M “Isn’t What it Used to Be”

Sure, with inflation, $1 million today doesn’t have the buying power that it had 30 or 40 years ago.  But who are we kidding? It still has a wonderful ring to it, and for many it is a rallying cry, a symbol of a nice round number to squarely aim your investment plan toward.

Let’s face it. A million dollars is still what is considered in high-finance terms a “boatload”.

So we need some powerful examples to prove to you that getting to that magical threshold is GREATLY enhanced through your ability to harness compounding at a very young age.

The chart below (courtesy of JP Morgan Asset Management) describes three people who each choose to invest $5,000 per year toward their retirement.

  • The first (Susan) contributes the $5,000 annually for 10 years, from age 25 to 35.
  • The second (Bill) contributes the same amount each year for 30 years, but not starting until age 35 (10 years later than Susan).
  • And the third (Chris) invests $5,000 per year starting at age 25 and continuing through age 65 (each assumes a reasonable 7% annual growth rate).

The results show that:

  • Even though Susan stopped investing at age 35 after 10 years, she still has MORE at age 65 than Bill, who invested $5,000 per year for 30 years but didn’t start until later.

* While Chris has only contributed $50,000 more by getting the early start ($5,000 a year over the first 10 years), he has over $1..1 million, which is half a million more than either Susan or Bill at age 65!

 * That’s nearly 50% of his entire retirement savings from just those early investments, and simply because it had time to compound!

Behold a picture of puppies, similar to those in all the ubiquitous Facebook videos that you can’t get enough of. What does this have to do with getting to $1 million? Absolutely nothing. But I know you love it and will stay engaged by the puppies. So I’m basically willing to sell out to keep your attention before jumping into the next chart of numbers.

Keeping to the $1 million theme, this next chart shows how much you would need to save each month starting at different ages to reach $1 million by age 65:

I’m sure you can come up with lots of excuses before getting serious about investing for the long-term, but do you really want to start having to commit over $2,100 EVERY MONTH toward the $1 million starting at age 45 when you can get there with $500 per month starting at age 25?

And remember, that $500 a month continues every month including all those months after turning 45, so this would basically be freeing up the other $1,600 per month every month from that point forward to either enjoy other things, or allowing you to accelerate your savings along the way to reach the goal much sooner.

“Today is the Greatest Day I’ve Ever Known” – Smashing Pumpkins

Can’t wait for tomorrow, tomorrow’s much too long…

Whew, the first real musical interjection of this entire post. But, unlike the puppies, totally relevant to the point at hand. Isn’t it obvious by the examples so far that, in financial terms, Today will ALWAYS be more valuable than Tomorrow?  Simple math.



Let’s do some more:

A More Dynamic (and Possibly More Realistic) Example:

In another scenario, which might better reflect your own reality, you may not be able to afford $5,000 per year but would be able to make incremental increases in subsequent years, based on increases in your salary and corresponding retirement contributions.

So even starting a bit lower than $5,000, the impact of these increases is a way to potentially achieve $1 million even sooner than age 65 (I know I personally used that acceleration strategy to get there way sooner than 65, since I didn’t want to wait that long!).

Here’s an example of how this might play out (using my planning template to model potential returns, which you can read about here):

As you can see, this example assumes:

• $40,000 annual salary with 3% annual increases
• 401(k) contribution of 10% of salary, and 3% employer match
• 7% annual return

This gets you over $1M at age 59  (conveniently just before you are allowed to begin 401(k) withdrawals at age 59 ½).

Want another break? Take a vicarious respite with me back at Bean and Leaf, where Rebecca, Marshall, Veronica, Katelyn, Natalie, Tyler, (and the other baristas I haven’t gotten around to meeting yet, or wish to remain nameless!) are serving up hometown Rochester goodness in a cup.

And there are still other ways you can get to $1 million sooner:

(a) Increasing the 10% contribution rate as your salary increases

(b) Saving retirement, for example dedicating a portion of annual bonuses, side gigs, or pay increases in excess of the 3% raise assumption (for example when you get a promotion) to a separate investment account.

How cool would it then be to have that $1 million by age 55? Or even 50?

Ain’t Too Proud to Beg

That’s right, I’m literally begging you to at least let the power of compounding sink in, so you have full information on what an ally it can be in your quest for Financial Independence.

Maybe meditate on it for two minutes every morning, or put a link to this post in the Notes tab on your phone.

And finally, while you probably don’t need me to threaten you with the converse, consider the results below if you were to:

Start ten years later
• Contribute 5%, not 10%, of your salary


Eek! Instead of $1  million, you’d have only ONE THIRD as much at age 59 vs the first example!

Saving the required amounts to really supercharge your future savings and take advantage of this Magic does take a lot of discipline. As I mentioned in a prior post, you need to have the mindset that you will think independently, not spend to keep up appearances, and consider each purchase as either a need, as opposed to something that may potentially detract you from your longer-term goals.

The payoff is HUGE!

Doesn’t it feel good having control of your future now, even if your “future” financial independence is 20 or 30 years away?

Then you can start to plan what to do with that $1 million… Maybe buy some furniture (a nice chesterfield or an ottoman), an exotic pet (like a llama or an emu), or just a nice reliant automobile (fans of this 90’s song know exactly what I’m talking about). And on a personal note, I definitely continue to eat Kraft Dinner!

Please join my mailing list if you haven’t already, feel free to contact me with any comments or questions, and be sure to follow @guidedbycoffee on Twitter and Instagram!  Thanks —  Scott


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