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The good money comes later in life

The concept of ‘retiring early’ has always eluded me. Only recently did I decide to look at this from a quantitative and slightly whimsy approach just to see how the math all works out.


The results and conclusions were interesting to note.


I did up up a table modelling the annual compensation packages in each year from the age of 24 - the assumed university graduation age - all the way to an arbitrary retirement age of 55. I assumed that past 55, one increasingly finds it difficult to obtain gainful employment.


At 24, starting with the average graduate monthly salary of S$ 3,000, I then applied an annual increment of 3.0%, which is more or less in line with the headline inflation rate.



The conclusion that I had arrived was:


Once you reach the onset of the forties, (and to be more specific, when you are forty years old), it will take only 10 years to recover all the income that you have earned over the last 16 years i.e. roughly equivalent to two thirds of the time taken.


Of course this simple abstraction trivially excludes any bonus payments received throughout the years, which we know too well can be unpredictable.


Furthermore not all increases in salaries follow the headline inflation. For example, getting promoted into a more senior position with more responsibilities typically comes with a double-digit pay raise, or sometimes even a multiple increase over the current income levels. It is also commonplace to see double digit raises when jumping ship, and in some cases, even a sign-on bonus.


But you get the point.


In some ways, applying a 3% wage inflation over one's useful economic life seems a tad conservative and over-simplistic. Even for non C-suite positions, moving between grades typically involves a huge bump in salaries.


So I decided to take it up a notch and model this more accurately using the pay progression in the consulting and finance industry, modelling it against what I remember of the Big Four accounting firms.


The chart looks something like this:



The numbers are even more pronounced once you hit your mid thirties and beyond. With ten years of experience on your back, it will basically take you only half the time required to obtain the same aggregate amount of income earned since you graduated - assuming you graduated at age 24.


Again this excludes any ex gratia payments along the way and significant pay bumps attributed to taking on more responsibilities on the job.


Clearly, the golden years of making money comes during your late thirties.

Extending this beyond the age of 40 reinforces this observation even more:



At age 40, assuming your salary remains stagnant at $15,000 a month, it’ll take you only about 6 to 8 years to recover all the income that you have earned over the span of your economic life since graduation, again excluding any ex-gratia payments.


In fact, many high performers in this age bracket consistently generate incomes well in excess of this amount, exponentially accelerating this process.


One can see the obvious conclusion here.


 

The pursuit of excellence often comes with expensive price tags, to the point where it will even feel like you are trading your waking hours for money.


But the good money comes later in life.


If you happen to be in your twenties, it is important to nurture a 'superpower' and be extremely good at what you do, even if it doesn’t pay well in the short-term.


Work can be a drag. But by giving up too early and 'retiring' at 40, you risk leaving behind a lot of money on the table.

Wed, Jun 19, 2024 |

by Kenny NG
@kennyngbc

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