The simple math behind early investing
FINANCIAL PLANNING
By Timothy Ulbrich, PharmD
As a new practitioner, saving and investing for retirement can feel abstract. It typically includes trying to plan for something way off into the future with big numbers you can’t feel today. If I suggested that you probably should be saving and investing for your retirement and that you will need north of $2 million, you might look at me like I have 2 million heads.
I get it.
You have many competing priorities, such as repaying student loans, buying a home (or paying expensive rent!), and building an emergency fund. While saving for retirement can easily be put on the back burner to focus on these other priorities, let this be a nudge to start saving early, even if it’s not large amounts.
Why? Compound interest is magical and needs a very important ingredient to reach its full potential: time. Albert Einstein once said, “Compound interest is the eighth wonder of the world. He who understands it, earns it.…He who doesn’t…pays it.”
While not all pharmacists are called to produce pharmaceutically elegant or sterile products, you should become a compounding pharmacist when investing. The longer you make regular contributions toward your investments, the more successful you will be. Because of the power of compound interest, time is just as important as the amount you contribute and arguably the most important factor in achieving long-term success.
To understand the power of compound interest, let’s look at two new graduates side by side.
Starting early is the key
Meet Alyssa and Jorge. They are both 24 years old, fresh out of a PharmD program and aspire to retire at age 60. Alyssa can start saving immediately (at age 24) by putting away $1,500 monthly.
For this example, let’s assume there are no employer contributions (aka match) for retirement savings. At age 40, Alyssa hits a snag with other competing financial priorities and stops saving for retirement altogether. Unfortunately, she isn’t able to save any more money toward retirement for the rest of her career.
On the other hand, Jorge isn’t able to save anything coming out of school for retirement, as he is strapped with debt and has purchased a new home and car that are using up much of his monthly income. However, at 40, Jorge decides he better get serious about saving for retirement and starts aggressively saving at $3,000 per month until he is 60.
Assuming an average of 8% annual growth in investments, at the age of 60, Alyssa would have $3.3 million saved compared to Jorge’s $1.9 million. Alyssa has more than $1 million more than Jorge, despite Jorge contributing approximately 2.5 times as much (Jorge invested $756,000 and Alyssa a total of $288,000). Remember, Alyssa stopped contributing at the age of 40! That is the power of compound growth and starting early.
Now it’s your turn
OK, now focus on your financial future. Use the Your Financial Pharmacist (YFP) Compound Interest Calculator to determine your projected investment total based on your savings rate and rate of return.
For more financial tips and information, check out YFP’s book Seven Figure Pharmacist (use coupon code APhA for 15% off), visit the YFP website, and listen to the YFP Podcast.
Tim Ulbrich, PharmD is the cofounder and CEO of Your Financial Pharmacist. Founded in 2015, Your Financial Pharmacist is on a mission to help pharmacists achieve financial freedom through fee-only, virtual comprehensive financial planning services via YFP Planning, as well as three weekly podcasts including the Your Financial Pharmacist Podcast, books, webinars, and numerous online resources.
Disclaimer: The information in this article is provided to you for your informational purposes only and is not intended to provide, and should not be relied on for, investment or any other advice. Read our full disclaimer here.