It’s one of those pieces of advice that gets repeated and repeated: “You should start saving money in your early 20s if you want a comfortable retirement!“
The case for saving is straightforward math. Compounded returns on investments means that after 48 years, an initial investment of $5,000 is worth about $70,000 (these are the nominal returns from a market that gives yearly returns of 6%).
The graph below is another way to look at this. If you’re planning to save $5,000 every year, it can literally be a $300,000 decision whether you decide to start saving when you’re 22 or 27, even though you’ve only invested an extra $25k over those five years.
With those kinds of returns, it would seem that it’s a no-brainer to save all your extra money as soon as you can.
But there’s a catch. This analysis doesn’t take into the opportunity cost of saving. There are many ways to think about opportunity cost, but one particularly important way in this context is: could you have spent that yearly $5,000 in a way that provided you other benefits that you would value at $300,000 by the time you turned 70?
The answer is almost certainly yes. Consider the following. How much do you value:
Good health at an advanced age. Health isn’t a commodity that can be priced easily, but none of us want to be ravaged with sickness in old age that make it difficult for us to carry ourselves, and confine us to the hospital, and perhaps, least of all, pile us with medical bills. While good health can’t be bought or guaranteed, gym membership and personal trainers can. If you are unable to commit to exercising regularly yourself, personal trainers might be a wise investment — expensive in the short run, but well worth it in the long.
Being able to speak a foreign language for most of your life. Every month, I pay $120 to take classes through Natakallam, a startup that connects people wanting to learn Arabic with a Syrian refugee who can teach them Arabic. Many of my friends are Arab and so I place a high value on the social and professional interactions that I get from being able to speak Arabic. As a Muslim, I also place a great value on being able to read the Quran in its original language. Although this is a fairly specific example, the idea generalizes to pretty much any skill set that you might want to invest in, some of which may, of course, even increase your income in the long run.
Traveling with friends and family to other countries. Psychologists pretty much agree that spending money on *things* doesn’t make you happier. But spending money on *experiences* generally does. Material possessions “yellow” quickly as you get used to them, but new experiences provide sustained satisfaction because even after you finish and come back, you understand the world better, you find new ways to connect with people, and you fondly look back on your memories with your friends and family.
So, the point is: if you’re young and deciding whether to save that next paycheck, remember that there’s probably something that you could spend it on that will be worth more than what you could get from the market in the long run.
To be clear, this isn’t an indictment of saving. Chances are, there are things that all of us are wasting money on, like paying for cable or buying snacks at a convenience store, and it’s certainly better to save money that would not spent be well. And eventually, there are diminishing returns from global experiences, new skills, and even good health. But until you get to that point, remember that every opportunity to invest for retirement could be a lost opportunity to invest in yourself.