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The One Thing You Have That Warren Buffett Doesn't

Barron's - 02/10/2017

Warren Buffett's net worth is roughly 7 million times that of the average millennial. But you are richer than Buffett when it comes to one thing.

Time.

Time is literally money when you invest. The longer you have money invested, the more your investments can cash in on the concept of compound growth. Your 50 and 60-something parents would kill to have the investing runway that is still in front of you.

To really get your head around the power of compound growth, you need to see the numbers. Let's say you have $1,000 to invest. And it earns 6% this year. At the end of the year your account is worth $1,060. ($1,000 x .06) Then your account gains 6% again in year two. If you think that gets you to $1,120 you're short-changing yourself. You earned 6% on your bigger balance of $1,060, not the original $1,000. That means you end year two with $1,123.60.

Granted, the extra $3.60 doesn't seem like a game changer. But when you keep at this for decades, compound growth becomes your investing best friend. As your balance grows, the impact of what you earn on that balance is magnified. In fact, in just 11 years, your annual earnings are bigger than your original investment. Eventually the earnings on your earnings become bigger than your original investment.

Buffett compares compounding to a snowball: The longer the hill you roll it down, the bigger it will grow.

To the young go the investing spoils

Let's assume you aim to sock away $5,000 a year, and your money will grow at 6% annualized rate.*

- If you start at age 25 you will have $1.126 million by age 70

- If you start at age 35 you will have $591,000 by age 70

- If you start at age 45 you will have $291,000 by age 70

"You make things so much easier for yourself if you can find a way to get started saving for retirement early on," says Luke Delorme, director of financial planning at American Investment Services.

Think you'll just save more each year if you get a later start? You may, but then again you may be raising a kid, or two, or more, and paying a mortgage and buying a bigger car... you get the picture. But for argument's sake, let's take a look at the savings rate needed to start later and end up with the same $1.126 million.

- If you start saving at 35, you will need to save $9,500 a year to reach age 70 with around $1.126 million.

- If you start saving at age 45, you will need to save $19,350 a year to reach age 70 with around $1.126 million.

That's some heavy lifting you're signing up for by getting a later start. And it's a very expensive strategy. Start at age 25 and you will invest $225,000 of your own money over the 45-year stretch to age 70. Start at age 35 and you will need to invest $332,500 of your own savings to end up with the same portfolio balance if you began 10 years earlier. Wait until 45 and over the 25 years left until you turn 70 you will pony up $483,750.

One more point: As crazy as it may sound, there's a good chance $1.26 million may not be enough for retirement 30 or 40 years from now. To avoid running out of money, a general rule of thumb is that you can't withdraw more than 4% a year, so you'd only get about $50,000 a year from that nest egg. In other words, you may still need to sock away more at age 35 or 45, even you start out with $5,000 now.

* An annualized return of 6% doesn't mean you will get 6% each and every year. Some years your portfolio will go up more than that. Some years it will fall in value. An annualized return is the average annual return for a given time period that factors in the ups and downs that can occur in any given year.

Copyright 2017 Dow Jones & Company, Inc. All Rights Reserved.

The statements and opinions expressed in this article are those of the author. Fidelity Investments cannot guarantee

the accuracy or completeness of any statements or data.

Dow Jones & Company, Inc. and Fidelity Investments are independent entities and not legally affiliated.

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