Building Wealth the One Percent Way
Recently we've heard a lot about the "one percent." Those titans of industry who dominate political, social and economic life and are almost wealthy beyond measure.
That's a club we'd all certainly love to join. Today we're going to talk about another one percent club, however. It's not as sexy as owning a fleet of Bugattis or thousands of square feet of prime Manhattan real estate. It doesn't come with exotic membership perks.
Yet it could have a significant impact on your financial fortunes. In fact, it could make the difference between a happy and successful retirement -- and years of bitter frustration lamenting missed opportunities.
The one percent doctrine
Recently Fidelity Investments released a report that has some astonishing things to say about the power of small changes.
The report examined the effect derived from putting just an additional one percent of your income into a tax advantaged retirement account.
Fidelity crunched the numbers for several hypothetical investors with 401k accounts and a projected seven-percent long-term rate of return. The following examples also assume an inflation-adjusted 1.5 percent yearly growth in salary.
A 25-year-old who earns $40,000 annually only has to save about $33 per month to reach one percent of income. Not much of a sacrifice, right? It will seem even more trivial once you hear the payoff.
$3,870 in additional yearly retirement income. Not so trivial anymore, is it?
You don't have to be in the beginning stages of your career to reap the benefits of the one percent doctrine. Another example:
A 35-year-old who earns $60,000 annually needs to put away an additional $50 per month to reach one percent of income. The result of this tiny increase?
An additional $3,210 in retirement income each year.
Even if you're getting close to 50, the benefits are still significant. A 45-year-old earning $70,000 who puts away an extra $58 per month will take home an extra $1,880 per year in retirement.
While not quite as dramatic, that's still an impressive haul for the price of a daily cup of coffee.
Fidelity advises the average investor to save at least 10 to 15 percent of income for retirement. That's sound advice -- although we'd encourage you to be even more aggressive.
What if you lack access to a 401k? Not a problem. You can derive the same benefits from an IRA. If you're under 70 with employment compensation, you can contribute $5,500 per year. That figure rises to $6,500 if you're older than 50. If you're older than 70, you can opt for a Roth IRA, which has no age limit.
Fidelity points out that the same compounding benefits accrue to IRA holders. A 25-year-old who saves $50 per month until 67 will have $4,620 in pre-tax retirement income each year, under the same scenario listed above.
Turning thoughts into action
The above numbers illustrate a universal truth about long-term saving.
Tiny sacrifices can have dramatic impact. If one percent of income has that kind of power, extrapolate that to two, three or four percent.
It's the easiest path to a wildly successful retirement.
Yet far too few of us seize this advantage.
Why? Inertia -- and lack of perspective.
We all want the same things -- wealth, happiness, health. Yet many of us can't force ourselves to make the necessary sacrifices.
That's partially a failure of perspective. We don't realize how small the required sacrifices truly are.
$50 a month? Fewer than two dollars per day?
If we're being honest with ourselves, that's not much of a sacrifice at all. Especially when the benefits are so significant.
There is no "wealth building magic wand" that confers instant, unearned riches. Yet what we have works almost as well.
It's nothing more complicated than a simple formula.
Work hard. Save early. Use tools such as 401ks or IRAs to gain tax benefits. Keep saving more as you age.
You cannot go wrong with this prescription. If followed to the letter, it is foolproof. Barring an unforeseen cataclysm, anyone who acts on this advice is going to end up wealthier and happier.
We've just seen the remarkable power a one percent savings boost can create. It's an eye opening set of calculations.
Now it's up to you to make it happen -- and get one step closer to your ultimate wealth building dreams.