Darian Frost's  Instablog

I remember back in my childhood (not that long ago) my fascination with business. With my sisters in the backyard we would play "resources" , a game of exchange where we assign value to things in the backyard and trade. This was at 10. So is it any wonder that I had paid a lot of attention to the Stock Market since I was very young? I have watched them (although probably not nearly as long as some of you) and seen some patterns and trends. So this article is hopefully the start of a series of articles I will write for this site, and the enlightenment of you. What I like about SA is that it provides the perfect forum for the convergence of youthful innovation and imagination, and reliable experience.

Recently I was asked to look over the retirement plans of a few different people, their circumstances differing widely (I never actually give concrete recommendations, I point them in a direction, and force them to talk to a financial consultant for the final allocation). After looking over their retirement plans and submitting my own ideas for consideration, I decided to take a lengthy look at my own retirement, and this is what I found.

As I read over many, MANY articles on Seeking Alpha, and I see people in real life almost at retirement frantically trying to generate a nest egg large enough to sustain them in their old age. I'd say that I have it easy, because it will be quite likely that I will be able to find even a low-paying job after college. I know that in order to adequately compound the money, I need a plan of action, and sooner than buy and hold for capital gains, I decided to use a more popular method here on SA. Dividend Growth Investing. I will admit the spreadsheet was hard, but here are my parameters.

1. "New Capital" is to be places in established "Dividend Champions" as coined by Mr. David Fish here. Possibly Contenders or Challengers (That is a company that has a track record of systematically increasing the dividend year over year for 25 years)
2. Companies must have consistent earnings growth (Even by a small amount, this is to ensure that its inertia is headed in the right way)
3. Companies cannot have an irrational payout ratio (85%+)
4. Stock Initially yields at least 3% based on levels at the time of analysis
5. The company must have a track record of increasing the dividend by 8% average annually

The goal for the end of the accumulation phase is to have an income of $50,000 per year for the foreseeable future

Because this is an article mainly about the usefulness of time in preparing your retirement, I will save stock-picking discussions for later articles, and instead focus on the average of the stocks with the criteria I laid out.

My Retirement

I have 50 years-worth of time on my side, so I am pretty safe. But just how much do I need to contribute per month in order to retire more-or-less comfortably?

So in order to retire with my comfortable income, I need a monthly contribution of $90 to maintain that, using dividend growth investing. Using the Dividend Growth Investment strategy (As explained here by David Crosetti), that monthly contribution can generate an income at retirement of $50,000. And of course, anyone following dividend growth investing knows that simply because we stop the reinvestment of the dividends, does not stop the income from growing at a nice clip. The fantastic thing here, is that we can legitimately calculate the time value of our investment! By taking the amount of money that we would have had if we just took the money and tossed it into an account that maybe covered inflation? The face value of that money would have been $54,000, which could sustain me for 1 year, if I took a liquidation approach to retirement, or yield $1,680 annually if put into an investment that yielded 3%. That would be my retirement income. That's it. 50 years is important huh? As you may know, the effect is compounded the more you contribute, the earlier you contribute. But what if we only had 40 years to accumulate? How much would we need in monthly contributions to have the same outcome? 30? 20? 10? Look what I found out

40 years

Important Information Points:

1. In order to maintain $50,000 in retirement income, $260 must be contributed per month.
2. At the end, contributions made up $124,800, or 7% of total retirement amount
3. Accumulated Interest made up $1,541,866 , or the remaining 93%

30 years

Important Information Points:

1. $760 must be contributed per month
2. Contributions made up $273,600, or 16% of the total retirement amount
3. Accumulated Interest made up $1,393,066, or 84% of the total retirement amount

20 years

Important Information Points:

1. $2,350 must be contributed per month
2. Contributions made up $564,000, or 34% of the total retirement amount
3. Accumulated Interest made up $1,102,666, or 66% of the total retirement amount

10 years

Important Information Points:

1. $9000 must be contributed per month
2. Contributions made up $1,080,000, or 65% of the total retirement amount
3. Accumulated Interest made up $586,666, or 35% of the total retirement amount

I hope that these points have proved to you the need for time in growing a retirement portfolio. I also compiled the Important Information Points into a spreadsheet here:

But we must also know that this is money invested over time. One last experiment I made is whether taking the $54,000 that would have been contributed into the 50 year account over those years, would significantly alter the ending balance, if it had been all invested at once. And it does. If I had $54,000 at the time I started accumulating for retirement (unrealistic to have that much money, I know) and never contributed to it at all over the course of those 50 years, my retirement income would have been a quarter of a million dollars. Further calculations show that in order to have the $50,000 retirement income we were looking for in the first scenarios, we simply must adhere to the same strategy, but have contributed $11,000 at the very beginning, which makes it .6% of the total portfolio value, making time generate 99.4% of the portfolio value.

Final Word

There is not a concrete value assigned to time. We cannot say that 50 years is worth a million dollars. Truth is, that the worth of time is directly proportional of how much you take advantage of it. Give it a large starting seed and 50 years, and it will reward you handsomely. On the other hand, give it a smaller nest egg to start with, or chip off valuable years, and time will give you much less. The reason why 1 extra year on top of 40 is so valuable, is because of percentages. When you first start, and your egg is just $10,000, a 3% appreciation takes it to $10,300. A nice start to be sure, but that same year and 3% applied to 1 million dollars takes it to $1,030,000. So a sacrifice now, could pay generous "dividends" in the years to come (pun intended).

I know that many of you are already invested and accumulating assets for retirement, so this is really preaching to the choir. The value this should have to you is to know exactly how much should be coming from outside sources in order to maintain the needed end result. Other than that this is an appeal to everyone else (your friends, for instance) to begin caring about their financial future, and just how much they should be caring.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.