As I reflect on the first half of life, I replay a few key moments – most of which I didn’t even realize they were key moments at the time. Someone asked me the other day what the best piece of financial advice I ever received. I immediately thought back to an exchange I had nearly 25 years ago in my first job out of college.
I was 22 years old and working at a small agency making just enough money to afford gas and groceries. Fortunately I was still living at home and had the opportunity to build my resume. After nine months at this job, I was very fortunate to land a position at a Fortune 500 technology company. This company was going to double my salary to a liveable wage of about $42,000 a year.
On my last day at the agency, I was saying goodbyes to coworkers. I stopped into a side office where two vendors were leasing out space as they were launching a tech startup. I only greeted these two guys in the morning when I arrived each day. They were not part of our company nor did we really do any work with them. I can’t even recall their names 25 years later.
As I said my goodbyes to them, one of the guys said to me – “I’m going to give you one piece of advice. You are living at home right now. Max out the 401K as long as you can.” Thanks, I thought to myself and went on my way.
A few weeks later, I was sitting in the HR office of my new company filling out forms. One of the forms was to set up a 401K. The only thing I remembered was the little piece of advice I received a few weeks earlier. I asked the HR manager, what is the maximum I can put into a 401K. She said that I could put in 16 percent of my salary and the company would match 50 cents on the dollar up to six percent. I agreed to max out the 401K to start. I figured if I needed extra money, I could back it down.
I worked for that company for four years. During that time I continued to max out the 401K and get the match. After the four years, I had accrued roughly $30,000 in the retirement fund.
I ended up changing careers. I was told that I could roll my existing 401K into an IRA.
I set up a Fidelity account and rolled the money over into an IRA. I visit the site once a year with the sole purpose of rebalancing the money. I invested in a large cap growth fund and two other generic funds. I have not added a single dime to that account since I was 25 years old.
Here we are, over 20 years later. I have a retirement account in my current job and if you can believe this, my current fund still has not caught up to that IRA from two decades ago. I have been averaging a 10 percent return annually for 20 years.
Play around with simple savings calculators. If you take $30,000 and put it into an IRA for 40 years. Without ever adding another dime to it, you would have over $1.3 million dollars in 40 years. I know that seems like a lifetime but it’s literally sacrificing for four years and setting yourself up.
As a hypothetical situation, even if you dialed back your contribution from 16 percent of your salary to just $300 a month, your $1.3 million dollars would actually be over $3 million by the time you are 65 years old.
Time and compound interest are your friend.
LESSON LEARNED
Obviously, the financial advice that I received was worth its weight in gold. However, the biggest lesson is that you never know who or when you will receive outstanding advice from someone.
I had very little interaction with those two gentlemen in my life. I can’t remember their names and would not be able to pick them out of a crowd. However, had I not received that advice I never would have even contributed to a 401K let alone maxed it out for four years.
As a middle aged man now, that moment in time is so profound. Why did he tell me that and why did I listen?
You can never understand why certain things happen but learning from strangers can be just as valuable as learning from friends or family. Advice is advice no matter where it comes from.
Embrace every opportunity to communicate and learn from people. You will have to sift through a lot of information that does not apply to you, but be open minded to determine what could have a tremendous impact on your life.