First Rule of Compounding

I wrote about 401(k) in another post (here), and I wanted to double down on one point…

I love 401(k)! Believe me when I say that it doesn’t even take a full 45-year career to become a 401(k) millionaire. You can really get there in half the time. Some of the key ingredients to success here are:

1) put away everything you can up to the max,

2) take advantage of any employer matching,

3) invest in low cost index funds (easiest is probably to do a target retirement fund that adjusts the mix of stocks and bonds as you get closer to retirement),

4) do it consistently year after year, and,

5) for crying out loud, DON’T TOUCH IT before retirement unless you absolutely have to!

In my other post, I wrote about the penalty you have to pay if you withdraw before the age of 59.5. I think the biggest penalty of an early withdrawal is not the fee you pay at the time (at least 10%). The biggest penalty is preventing yourself from getting wealthy. As Charlie Munger famously said, “The first rule of compounding: Never interrupt it unnecessarily.” 

If this Charlie Munger quote is the only financial lesson I teach my kids, but they really understand and internalize it, they’ll be alright. It really is that important and could mean the difference between retiring as a millionaire or retiring with nothing but regret.