This post originally appeared in April 2014.
The short answer is no. It is never too late to start investing, particularly if you have access to a defined contribution plan – such as a 401(k), a 403(b) or the Thrift Savings Plan (TSP) – through your employer. These types of plans offer at least one distinct benefit and one potential benefit. First, the money you contribute to a defined contribution plan is done so on a pre-tax basis, meaning your annual tax liability is reduced. Second, if your employer provides matching contributions, that is free money. Why would anyone pass up free money?
However, I would offer a couple of caveats to the idea that it is never too late to invest. First, hopefully people do not confuse it doesn’t matter when you start to invest with it is never too late to invest. To be certain, it absolutely matters when you start to invest; when you begin to put your money to use. As illustrated in the story of twins Ronald and Robert, time is a huge factor with respect to building a retirement portfolio and becoming wealthy.
Summarized, one twin – Ronald – invested $1,000 a year for seven years, left the resultant gains in place, but decided to stop investing new money for the next 25 years. His total contributions: $7,000. Conversely, his brother, Robert, did not invest any money during the seven years that Ronald did; however, he did start contributing to his retirement accounts at the same time his brother stopped, deciding to faithfully contribute $1,000 annually for the next 25 years. His total contributions: $25,000.
Because of the power of compound interest, partnered with time, Ronald’s nest-egg exceeded Robert’s nest-egg even though he contributed $18,000 less. Do not underestimate the power of time and compound interest!
Second is the issue of asset allocation. Traditionally, as people approach retirement they make adjustments to the composition of their portfolio. The movement out of stocks, which are more risky, to cash and bonds, which are less risky, is often done because people’s tolerance for risk decreases as they age, and to protect a portfolio’s value in retirement.
One guide that some use is to subtract their age from 100. That number is the percent of their portfolio that should be in stocks. As an example, a 25 year-old might maintain 75% of his or her money in stocks – with the remainder in cash and bonds – while a 65 year-old would only maintain 35% in stocks – again, with the remainder in cash and bonds.
The danger in starting later is that there may be a desire to make up for lost time by maintaining a higher percentage of the portfolio in stocks at later ages. The worst thing that could happen is to invest too aggressively and lose a significant portion of a portfolio while closing in on retirement, the last 3 – 5 years, or soon after going into retirement.
Is it ever too late to start investing? No it isn’t. However, let there be no doubt that the best bet is to start investing as soon as possible and not put yourself in a position where you feel a desire to invest too aggressively toward the end of your working life. Leverage the power of compound interest early and develop a solid withdrawal plan as you close in on retirement.
How about you SavvyReader, have you started investing and do you have a retirement portfolio in place? If not, what are you waiting for?