I’m nearly finished with The Wealthy Barber, and will post a review soon. However, I wanted to share this passage, which echoes my previous comments on the power of compound returns.

Roy, the wealthy barber, is lecturing his patrons:

“Regardless of which tax-deferred vehicle you select, IRA or other, start contributing now! I can’t stress that enough.

“Two twenty-two-year-old twins decide to start saving for retirement. One opens an IRA, invests two thousand dollars a year for six years, and then stops. His IRA compounds at twelve percent a year … very good. The second twin procrastinates and doesn’t open an IRA until the seventh year — the year his brother stopped. The second twin then contributes two thousand a year for thirty-seven years. He, too, earns a rate of twelve percent a year. At age sixty-five, they go out for dinner to compare their IRA holdings. The second twin, who is fully aware that his brother stopped contributing thirty-seven years earlier, is confident that his IRA will be worth at least ten times as much. What do you think, Cathy?”

“I think he’s wrong … or you woulnd’t be telling us the story,” was her clever rationale.

“Yeah, yeah,” Roy laughed. “At age sixty-five, they would both have approximately one million two hundred thousand dollars.”

The first brother paid $2,000 a year for six years. He contributed a total of $12,000. The second brother contributed $2,000 a year for thirty-seven years. He paid a total of $74,000 — more than six times his sibling!

Start saving for retirement NOW!

This article is about Basics, Investing, Retirement