The Goldilocks Decade of Investing

The historical return for the S&P since its inception in 1957 averages out to 6.5% annual growth after being adjusted for inflation. At an annual growth rate of 6.5%, it only takes 11 years for $1 invested to double into $2 and 22 years to quadruple into $4.

With money essentially doubling for each decade it’s invested in the market, it should become clear that investing earlier yields higher returns because you’re giving your capital more time to compound.

Someone in their 20s investing still has four decades for their investment to grow before they retire whereas someone investing in their 50s would be lucky to double the investment before retiring at the average age of 65.

Here’s what the math for compounding interest looks like in practice:

• Every dollar you’ve invested by the time you turn 30 will be worth $9 when you retire at 65.
• If you don’t invest in your 20s but only start investing in your 30s, every dollar you invest by the time you turn 40 will be worth $5 when you retire at 65.
• Waiting until you’re 50 to invest will make each dollar invested worth $2.5 by your retirement
• If you wait even just five years longer until you’re 55 then it’s unlikely that you’ll even be able to double your money before retirement

This is even easier to visualize in table form:

Some people think that they should wait until they’re older because a higher income will allow them to invest more. The math disagrees and clearly shows that how early you start investing is the largest factor that will determine how much money you end up retiring with:

• $1k invested by age 20 is $17k by age 65
• $2k invested by age 30 is $18k by age 65
• $4k invested by age 40 is $19k by age 65
• $8k invested by age 50 is $20k by age 65

As you can see, someone in their 20s needs to invest twice as much as teenagers to retire with the same amount of money. Similarly, a 50-year-old would need to invest 4x more than a 30-year-old to retire with the same amount of money.

You’re investing significantly more money but ending up with the same amount as someone who invested less but started earlier. This means you would need to quadruple your income between the ages of 30 and 50 just to catch up which simply isn’t realistic for most people.

Data from the US Bureau of Labor Statistics shows that salary growth is much slower than that.

The median annual earnings for the 25 to 34 age bracket are $57,356 versus $68,432 for the 45 to 54 age bracket. This represents less than 20% growth between the two age brackets and makes it nearly impossible to catch up with the compound interest missed by investing too late.

If teenagers have an abundance of time for their money to compound but not enough cash to invest while middle-aged investors have plenty of income but hardly any time left for compounding then when is the optimal time to invest?

The Goldilocks decade for investing is generally around your late 20s to early 30s.

This is the period in your life when you have the ideal combination of high annual income and decades of compounding time left. If your teenage self is time-rich and cash-poor while your older self is cash-rich and time-poor, it’s up to your young adult self to pick up the slack for both.

Despite most teenagers not having much money, it’s still worthwhile to invest smaller amounts in order to build good financial habits early on and capitalize on the 17x multiplier that each teenage dollar invested will have at the time of retirement.

As an aside, longer investment horizons also reduce risk.

If you have all your money invested in the stock market and it crashes less than a year before your retirement, you’ll be forced to sell shares before things can rebound. In contrast, someone who started investing in their 20s can wait out any recessions throughout the decades.

Beyond risk reduction, another benefit of investing sooner is the option to retire early.

If you need $100,000 to retire then investing $25,000 by the age of 28 (which will quadruple over the next 22 years) will help you reach that target by your 50th birthday instead of making you wait another 15 years until the average retirement age of 65.

The goal of this article is not to discourage anyone in their 40s or 50s from investing. You should still do your best to invest instead of using lateness as an excuse to give up. Rather, the point is to emphasize the importance of investing as soon as possible, whenever that may be for you.