Most twenty-somethings fall victim to this; but it’s preventable.
Jim Lorenzen, CFP®, AIF®
You’ve seen it – you may have even done it yourself: a 25-year-old who has been out of school for several years is beginning to get (somewhat) established in his/her first possible career position (which may likely be one of many before reaching age 35) and looking to enjoy the newly-found independence and early success.
A new SUV, instead of an older one (because of ‘no-down, zero percent financing’, etc.); a nice apartment in a nice area, instead of something smaller; brand-new expensive furniture instead of starting out with second-hand. In short, living month-to-month convinced they haven’t a dollar to spare – because it’s true.
What if a corner was cut here, another there – enough that allowed a savings of just $92 per week – about $400 per month… money that could be diverted to a retirement or other account?
How much would that 25-year old have saved by age 65?
It depends. Let’s assume that s/he simply puts that money into a low-cost, tax-efficient fund or ETF that tracks an index of large company stocks, something like the S&P index (you can’t buy an index, only a fund that tracks it). Historically, long term returns on such an index has been somewhere around 10 percent. But even if the return were 20% less – 8% – our now 65-year-old would have (rounded-off) $1,396,408. Almost $1.4 million!
But, 25-year-olds seldom do this. They wait until they’re age 40 or 50 before they begin to get serious. Problem is, by then $400 per month savings getting the same return by age 65 will have them ending-up with just $380,410…. More than $1 million less!
To catch up and end-up with the same $1,396,408, our 40-year-old needs to save 266% more each month, $1,468.
One might respond, “Yes, but by then I’ll have more money!” True; but, things will cost more, too. Using a long-term 3.5% inflation rate (not unreasonable), that $1,468 the 40-year-old saves has the same purchasing power as $876 has for the 25-year-0ld.
The moral: Start early and increase your deposits as you age. Don’t wait. The biggest gift you can give your children is not their education. Maybe it’s making sure they aren’t faced with additional responsibilities in your old age.
Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and an ACCREDITED INVESTMENT FIDUCIARY® serving private clients since 1991. Jim is Founding Principal of The Independent Financial Group, a registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.