Did you know that you might be losing out on $100,000 for every single year that you delay investing? So it’s time to start now, right? Right. The earlier you start investing, the easier it will be to retire. But at what point have you invested enough? When can you be confident that your investment portfolio will provide for your retirement? This is called your “stop investing” number — when your portfolio is big enough to achieve your goals without contributing another cent. And you’ll reach it much earlier than you think.
Let’s Talk About Exponential Growth
Before we get into your “stop investing” number, we need to understand a bit about exponential growth, and how it affects our investment portfolios. For a more in-depth explanation, check out this post. But as a TLDR, exponential growth is the math that powers your investment gains. Over time, your investment portfolio increases. How much does it increase by? The answer to that question is determined by the following equation:
Future Value = Current Value * (1 + rate) ^ time
For example, if you currently have $100,000 invested and you expect your portfolio to grow at a rate of 7% for the next 10 years, your future portfolio will equal
$100,000 * (1.07) ^ 10 = $196,715. Not bad for leaving your money alone for 10 years! We will use exponential growth to show that you might be able to stop investing right now, and still retire comfortably with a sizable nest egg.
Current Value = Future Value / ((1 + rate) ^ time)
What this means is we can efficiently calculate a target net worth that lets you stop investing, but still hit your portfolio goals.
What is your “Stop Investing” Number?
Using the above equation, we can calculate your “stop investing” number. This number represents a portfolio that, if left alone in the stock market, will increase in value to achieve your goal without any intervention.
If you hit your “stop investing” number on time, you can just stop investing. Your portfolio will realistically hit your goal in time. Let’s use the previous example. If your goal is to retire at 65 years old with $1,000,000 in your portfolio, the following table shows you your “stop investing” numbers by age.
The way to interpret this chart is “if I’m the age in column 1 and have column 2 invested in the stock market, I can stop investing.” Looking at these numbers, they aren’t crazy. Who knew that if you saved $71,500 by the time you were 26, you can stop investing and enjoy a $1,000,000 nest egg by the time you retire at 65.
You can use the following form to calculate your own “stop investing” number. Just fill in your Future Value goal in dollars, your Time in years, and expected Rate (for example, 7% = 1.07). The form will then tell you exactly how much money you need invested right now to hit your goal.
Financially Secure at Age 21?
Looking at the above Excel sheet, we can see something crazy: if you have $50,000 invested by the time you’re 21 years old, stop it. You’re done, you don’t need to invest anymore. At least if you want to have $1,000,000 when you’re 65.
Hitting $50,000 NW by the time you are 21 isn’t impossible. Let’s say that you decide not to go to college at age 18, and work really hard. You’ll only need to save $16,700 per year during those 3 years.
That sounds like a lot but, just live with your parents! After doing this for 3 years, you’re set and can do whatever you want. Maybe go to college, travel on the cheap. Whatever you do, invest that $50,000 and enjoy the ride. You could always try and hit $70,000 by age 22 or 23, and you’ll be really far ahead.
It’s fun playing around with these numbers, so I created a simple spreadsheet that lets you manipulate your portfolio goals, estimated growth rate, and your goal retirement age. If you’re going to use this to create “stop investing” targets, I would check back every year to make sure that you’re still on track.
If you are lagging behind, you can always start investing again to get back on track. Plus, you can always add in a cushion, say 10% to your portfolio goal (cell E2) to improve the likelihood that you’ll achieve you goal.
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After you Stop Investing, What’s Next?
This information is really interesting. In fact, it’s empowering. So many of us work very hard, saving as much as possible to hit our retirement goals. Well, you might be done already. You might be able to stop investing, enjoy your money now, and enjoy your money in retirement.
It also might stress you out. For example, my goal is to have $1,000,000 by the time I’m 35. I’m almost certain that I won’t achieve this goal, but I’m trying anyway. Right now, I’m $400,000 behind my “stop investing” number. This knowledge is enough to make me push harder to achieve my goals. Maybe I’ll get there, maybe I won’t. But now I know how I’m doing.
Are you close to your “stop investing” number? If you are, will you stop investing and enjoy more today? Why or why not?