Can you Build Wealth by Saving your Money?
What is Job Security?
Job security is an industrial age concept that allowed workers to give their time to a company for many years without a threat of being laid off or fired. This gave them comfort to live their lives, save some money and not worry. In what sectors do we see this today? Honestly, nowhere. Even that last bastion of permanent long term employment, the government, is laying off workers. Probably, the only place in North America where this still exists is in the Canadian government. So assuming you have some semblance of job security, you should be able to save some money and according to the system, you should be able to build wealth by saving some of it.
What is an RRSP or 401K?
Ok, I know that most of us know what this is, but here is the definition anyway. An RRSP is a Registered Retirement Savings Plan. In the USA this is known as your 401k. In either case it is an investment program that allows you to take part of your earnings and place them in an investment. You can then typically deduct the money you have invested from your current year’s income allowing you to pay less taxes for that year. The government will still get their income taxes on this because they will take the taxes off when you withdraw the money invested at retirement. The idea behind it – you will be making less money at the age of 65 than you make today at 25, so your tax burden will be less.
The BIG assumption of the RRSP or 401K is that, as long as you deposit money with every paycheck, you will experience the power of compounding. If you don’t take the money out until your 65, after 40 years of investing, you should have Millions.
Here’s a question? What if you haven’t been consistent in your investing? What if the crash of 2008 shows up again?
Can you build wealth this way?
Remember our definition of wealth: Having enough money put away so that you do not have to work anymore, and there is enough money coming in to cover the lifestyle you want to live. How much money in your account will make this true for you?
Here is an example:
At the age of 25, you deposit $10,000 in your RRSP or 401K. you contribute $200 per month to your retirement plan. Assuming that you get an average return on your plan of 5% plus or minus 2%, you will have anywhere from $205,032.43 to $585,484.90 in your account at age 65.
How long will that last?
The government actually has a minimum amount you must withdraw. In this example, based on the $585K number, you will have to withdraw at least $22,093.74 annually once you reach 71. If this is your only income, I will assume that this poverty level income amount is not enough. Let’s say you can survive on $50,000 per year at your retirement, adjusted for inflation. You will deplete your savings by the age of 94. Not too bad right? Will you be able to survive? Yes. will you be happy with the lifestyle? I don’t know. So the answer to the question, can you build wealth by saving your money, may be yes, if this is your definition of wealth.
- In this example, you started at the age of 25. What if you start later than that?
- At age 30, you will have $438K, it will last you until your 79.
- At age 35, you will have $302K, it will last you until your 73.
- At age 40, you will have $206K. It will last you until your 69.
- If you are 50, you will have a whopping $87K at age 65. It will last you until your 67.
Can you save your way to wealth?
I suppose it depends on your definition of wealth. I can only say that based on the numbers, the later you start saving, the more likely the answer is NO. If you haven’t started by the time your 30, you can see what happens. With the average life expectancy now at 83 years old, even if you invest perfectly over your lifetime, the odds are you will run out of money way before the good lord comes to get you. In my opinion, the definitive answer is No Way.
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