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The Tortoise and the Hare Parable Doesn’t Work in Your 401(k)

401(k) 401k compounding

I’m sure you grew up hearing the story of the Tortoise and the Hare, where the hare takes off like a shot, quickly wears himself out and has to stop and take a nap, all while the tortoise’s slow but steady pace ultimately wins the race.  We’re taught to pace ourselves in lots of areas of life – from losing weight to taking a difficult test…” slow and steady wins the race.” That’s generally good advice, except in the area of investing for your retirement.  Why?  A mathematical fact called Compound Interest.  Simply put, it takes money to make more money.  And the longer the amount of time that money has to be invested, the more “free” money it will make you. 

2 scenarios to illustrate my point:

  1. Olivia is our hare. By age 25 she is saving aggressively into her 401k at $20,000/year for the first 10 years of her career.  But then life throws her a curve ball and she can’t save anymore, ever.
  2. Jack is our tortoise. He saves $10,000/year for his entire 40-year career from age 25 to age 65.

Both people earn the same 8% average annual return on their investment.

What do they each have at age 65?

Olivia, the hare, comes out on top.  Even though she saved the least amount ($200,000) of her own money, the power of compounding interest, and time, transformed her 401k into the biggest balance by age 65 at $2,915,000.   

Jack, the slow-and-steady tortoise, doesn’t fare as well in our race, even though he really saved consistently.   He socked away twice as much savings as Olivia - $400,000 of his hard-earned money compared to $200,000 of hers – but because there wasn’t as much money in his 401k in those critical early years, he ended up with over $720,000 LESS than Olivia, coming in at $2,193,000 by age 65.   

The conclusion? 

In the early years of your career, nothing is more important than prioritizing 401k savings over anything else, including your first home purchase.  Front-end loading your 401k means that, in total, you’ll have to sacrifice less of your paycheck toward retirement savings and still end up with a bigger retirement account balance in the end! You’ll have to save less…which means you can spend more…and STILL come out as the winner.  It’s magic – well, it’s really just the magic of compounding wealth.  Start EARLY and save as much as you can and then in the second half of your career, you can cut back on retirement savings and save for other fun things instead!  

Want to see for yourself? Use this Compound Interest Calculator to see how much your money can grow using the magic of compounding interest. 

Check out Darren Hardy's The Compound Effect for a deep dive into compounding interest and how you can apply it to your own life!

And in the words of Albert Einstein, "Compound interest is the eighth wonder of the world."

- Yvonne 😊

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