The power of time and one way to use it

Time is inexorable.

Imagine that you are in a railway car, one from which you cannot escape. It moves at a constant rate toward some distant end. You may want to go slower, or faster, but cannot. You can earn and spend money to buy things. Bigger house. Nicer car. Great clothes. But you cannot buy more time. That railway car just keeps chugging along, day after day, year after year, to a remote, misty end.

When the journey is new, and we are young, and that shiny track extends far over the horizon, we think that time is limitless. We think nothing of wasting it. Wishing it away. “If only it were Saturday.”

But as the journey progresses, our life events pile up and mark time’s passing. Marriages. Births. Deaths. We become more sensitively attuned to our journey. Now, each new year, each birthday, each season, gives us pause, because the remaining ones are suddenly quite finite and countable. We don’t know how much further this train has to travel, but sense that our journey has an end.

Time is, in fact, our only priceless, irreplaceable possession. We only have so much, and it passes relentlessly whether we use it wisely or squander it foolishly. Time doesn’t care. But we should.

How can we best use and appreciate our time, this infinitely precious gift which has been bestowed upon us? Books have been written on making memories, forming bonds, creating and giving, all things which enrich our lives and make our time more valuable. But let us focus on one bit of advice to those who are  still young, who have the power of time in their favor.

Let’s say you are 20-something, just out of college, in your first job and enjoying life (as you should). Although it is far distant, you should give some attention to enjoying your retirement as well. After a long working career, you and your family will deserve to relax, travel, and otherwise relish a well-earned retirement.

But today, many American families are ill-prepared. According to the Economic Policy Institute, “nearly half of families have no retirement account savings at all.” Social Security is a wonderful foundation, but is not enough on its own and must be supplemented. The most important thing you can do is to regularly contribute to a tax-advantaged retirement account (401K, 403B).

At this point in your life, you will have forty years or so to build that retirement cushion. And that much time is a powerful ally.

Here is a hypothetical case of an individual approaching retirement. Let’s call her Sally.

Sally is 65 years old and plans to retire in the next couple of years. As a young woman, she decided to provide for her future by regular investment in the stock market. Starting in January of 1976, she began saving about $6.50 per day and at the end of each month bought a $200 share in an S&P 500 fund. She repeated this month after month for 40 years.

We all know the market has seen some terrible crashes along the way. But Sally persisted and invested $200 each month, a technique she may not have known is called dollar cost averaging. By investing a fixed amount each month, she automatically bought more shares in a down market and fewer shares in a costly market. Over the forty years of her investment career, Sally maintained her discipline, allowing the balance to ride and adding her monthly buy like clockwork. What are her results?

Forty years is 480 months, so Sally invested a total of $96,000 (480 x 200). But she allowed all dividends and earnings to accumulate and grow, and never lost her nerve. At the end (based on actual stock market returns) she would now have $600,000 in her account. Not bad for the cost of a hot dog, cup of coffee, and a lottery ticket every day.

Better still, Sally can begin drawing regular payments from her nest egg, $3000 per month for the next 20 years (assuming a nominal 4% appreciation rate). That’s on top of her Social Security. Look out Tuscany, here we come!

This is not to advise you to invest only $200 per month. On the contrary, invest as much as you comfortably can. Many companies will provide a match for 401K contributions up to a certain percentage of your salary. You should always invest enough to get all of that matching contribution. It is quite possible to retire with a million dollars in your pocket.

Time is a powerful ally. But unfortunately, to take advantage of it, we must start young. And that’s precisely when we don’t appreciate it. God’s way, perhaps of keeping us all from becoming millionaires.

How to retire a millionaire

Say that you were starting out your working career all over again and the challenge is how to retire, 50 years later, a millionaire? Let’s neglect for a moment that in 50 years from now (2061), inflation will have rendered "millionairehood" quotidian. Instead, imagine this is 1961 and you are surveying the last half of the 20^th century for your best chance to retire in 2011 as a millionaire. Which would you choose?

1. Play the lottery, $2 per day, 5 days a week ($10 per week)?
2. Invest that same $10 weekly in a Standard and Poors 500 stock index fund?
3. Marry a cop or schoolteacher?

Although there is an argument to be made for door number 3 (Forbes, "The Millionaire Cop Next Door"), let’s focus on choices 1 and 2. In order to analyze these choices, we will need a little math. (Yes, your high school algebra teacher was right – you will find this stuff useful).

Playing the Lottery

Playing the lottery is a popular choice because it is relatively painless. Spending a couple of bucks a day has little opportunity cost, i.e., you are not depriving yourself of coffee or hot dogs or paying the rent or other such daily necessities. But what are the odds of winning a million bucks? Let’s take the Massachusetts Cash Winfall lottery as an example. This game of chance costs $2 and asks you to pick 6 numbers of 46. In order to win the jackpot, you must select the proper winning numbers, each with the following odds:

1^st digit 1 out of 46 (2.1%)

2^nd digit 1 out of 45 (2.2%)

3^rd digit 1 out of 44 (2.2%)

4^th digit 1 out of 43 (2.3%)

5^th digit 1 out of 42 (2.4%)

6^th digit 1 out of 41 (2.4%)

Those odds don’t look too tough. With over 2% chance of selecting the correct number for each choice, you should be a big winner if you just play the game 50 times, right? Unfortunately, that’s not how probability works.

To calculate these odds, you must multiply the probabilities (1/46 x 1/45 x 1/44 x 1/43 x 1/42 x 1/41), which yields a vanishingly thin 1 out of 6,744,109,680. If you were required to select the numbers in the exact sequence in which they were drawn, this would be your odds of winning. Fortunately, the lottery does not require that you match the order of the numbers drawn, so the above odds can be reduced by taking into the account the number of different ways (orders) in which the winning number could be drawn.

The first winning number could be drawn as any of the 6 digits, the second as any of the remaining 5, the third as any of 4, etc. So the total number of ways that the winning numbers could be drawn is 6 x 5 x 4 x 3 x 2 x 1 = 720. We can now divide 6,744,109,680 by 720 to determine your actual odds of winning – 1 out of 9,366,819. To put this into perspective you would need to buy one ticket per week for 180,000 years before approaching certainty of winning. Did you really think it would be easy? How many million-dollar lottery winners do you know?

How about the popular Powerball game? It requires that you select only 5 numbers (and then that pesky 6^th Power Ball). This game is rigged to make your odds much worse. The first five numbers are drawn from a pool of 59:

1^st digit 1 out of 59 (1.7%)

2^nd digit 1 out of 58 (1.7%)

3^rd digit 1 out of 57 (1.8%)

4^th digit 1 out of 56 (1.8%)

5^th digit 1 out of 55 (1.8%)

Multiplying these probabilities and then dividing by the number of ways the numbers could be drawn yields a friendly 1 out of 5,006,386. But that must then be multiplied by the probability of selecting the final Power Ball number, 1 out of 39, yielding the overall odds of winning as 1 out of 195,249,054. Feeling lucky?

Bottom line, you could spend an entire lifetime squandering $10 on lottery tickets each week and your odds of hitting the big one are still much less than being hit (multiple times) by lightning.

Playing the stock market

Everyone knows that the stock market is risky. But it is orders of magnitude less risky than playing the lottery. Since 1950, the Standard and Poors 500 stock index has returned an average of 10.8% on your investment. (Yes, that includes the recent financial meltdown).

What would happen if, as an eager young worker, you resolved to put $10 each week into an S&P 500 index fund? Further assume that your account grew tax-free (e.g., an IRA or 401K), and that all earnings and dividends were reinvested. At the end of a 50 year working career, you would have accumulated a million bucks if your average stock market returns were in the neighborhood of 10.5% (see nearby chart).

Now the stock market has no guarantees and it is certainly possible to lose capital, especially in the short run. I would no more recommend that you put all of your money in the stock market as I would urge you to bet it all on the lottery. But $10 per week is a cheap gamble on the market with far greater odds of gaining you a million bucks than hitting the lottery. Here’s my advice – play the lottery for fun, play the market for retirement, and keep some money safe – at least a 6-month emergency fund. That gives you the best odds overall of retiring a millionaire.

Of course, you could always marry a school teacher.