Smart Kids Don't Follow the Crowd!
When I was young, my father told me, “Jim, if you just save 10% of everything you ever make – and start NOW – you’ll never have to worry about money the rest of your life.” Parents. What do they know?
The fact is, the “start NOW” part is the most important part of that sentence! I didn’t know it, of course; but, saving during those early years truly do make a huge difference.
Most recent grads not only find it difficult finding work; but, it’s difficult paying the bills in those recent years; so, savings is something that’s easy to put-off until they “can afford it”. Nevertheless, if they buy an old car instead of a new one and resist the urge to ‘keep up’ with their friends, they can usually find a way.
Do you have kids or grandkids that have recently graduated and entered the workforce? They may benefit – we all hope so, anyway – from this little lesson. Since concepts are more important than numbers – you can always change the numbers, I’ll keep the numbers simple for my little hypothetical comparing Fred and Gary. We’ll also assume all investing is done in a retirement account, so we can ignore taxes.
First, to give Fred and Gary some time to get going, we’ll start them both at age 25, giving them 40 years using the normal 65 age to retire, though many are working and even starting businesses past that date.
To keep our hypothetical simple, let’s assume that each saves only $2,000 a year and never increases their savings, and that they earn an average annual return of 8%.
Annual savings: $2,000
Average annual return: 8%
Fred saves $2,000 a year for ten years from age 25 to age 35 and stops saving. But, he does leave his money in his account to accumulate at 8% until he’s 65.
Gary waits until he’s 35 before starting. But, Gary invests $2,000 a year, beginning at age 35, for thirty years… all the way to age 65. Who won?
At age 65, Fred, who invested during only the first ten years, ended up with $291,546. Gary, who invested for thirty years – three times as long - but started ten years late, ended up with $226,566… almost $65,000 less! In fact, for Gary to have tied Fred, Gary would have had to invest $2,573 a year – 29% more – each year for all thirty years!
Fred invested for only ten years! But, it was the FIRST ten! What if Fred hadn’t quit after ten years? What if he’d kept going to age 65? His final number, on only $2,000 a year, would have been $518,113? That means those first ten years, by not investing, cost Gary $291,547!
Do the math: Those first ten years, by not investing $2,000 in each year, cost Gary $29,154 per year!
Dad was right: Start NOW.
Jim Lorenzen is a Certified Financial Planner® and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California. IFG provides investment and fiduciary consulting to retirement plan sponsors, and retirement and wealth management services for individual investors.
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