Sale! Sale! Sale!

We’ve discussed the power of time here before—how it’s your most valuable asset, how it’s slowly diminishing, etc.—but I realize it can still be a hard concept to grasp. Our brains are not wired for long-term thinking. After all, our ancestors probably weren’t thinking much about what they would do in “retirement” when they were focused on catching their dinner for that night (and not being dinner that night). Heck, retirement probably wouldn’t be high on your priority list if it consisted of being pushed out to sea on an ice block. Fortunately we live in an age where our basic needs are easily satisfied and we can afford to think about the future, but our reptilian brains still struggle conceptually.

In that spirit, I want to look at the long-term in a different way. Namely, what does your future income cost today? Part of the struggle with wrapping our head around long-term planning is that it’s so abstract. Much like the human brain struggles to conceptualize the massive size of the Universe, the long-term effects of compounding and the meaning of future dollars are also challenging to picture. What does $1 million at retirement even mean anyway?

Presented below is the cost of $1 of monthly income at retirement depending on when you’re “purchasing” it.

Cost of Retirement Income Chart

For those of you who care about the assumptions, I assumed an 8% return pre-retirement and a 6% return during retirement for 30 years. What this shows is the “cost” of $1 of future monthly income depending on when it is “paid” for. Thus, if my retirement is 25 years away, for example, every $24.48 that I save can generate $1 of monthly income for the rest of my life beginning when I retire. The biggest takeaway from the chart, of course, is how much cheaper retirement income is the earlier in your life you purchase it.

We could play around with the return assumptions, but the relationship relative to time would still hold—it’s dramatically cheaper to purchase retirement income when you are 30 than when you are 55. So if I’m a 25 year old (it seems like just yesterday) and I’m planning on a normal retirement at age 65, for every $7.72 I save, I will be able to withdraw $1 per month ($12 per year) to live off of starting at age 65. If I’m 55 (my child makes me feel this age sometimes), that same $1 of monthly income costs me $77.64—about ten times as much. In other words, the best offer you’ll ever get is happening right now!

The lesson, as usual, is save early. Your dollars are so much more valuable today! Too many times I see people fail to realize the impact their early dollars have—“Why bother saving if it’s just a few hundred dollars?” Don’t let that be you. It’s literally a limited time offer, so take advantage while you can.