As I sit in front of my glowing laptop tapping out these lines, it’s 2 o’clock in the morning and I am in a semi-dark hospital waiting room 3,000 miles from home awaiting the birth of my grandson, my daughter and son-in-law’s first child. (UPDATE: William was born as this piece was being written—8 lbs. 13 oz., 20 inches; mother and child are both doing great.)
Thinking about this wonderful event and how my profession can impact this child’s future and the futures of millions more like him has reminded me anew that despite the importance of what we do (and the importance we place on what we do), the most important financial decisions my grandson can make will have precious little to do with our profession as it exists today.
In fact, these crucial decisions will largely determine whether he will ever hire someone like me and whether anyone in our profession will come to see him as a desirable client.
The single best piece of investment and financial planning advice I can offer to my grandson or anyone else is to start saving and investing early. Einstein may never have said it (as claimed), but compound interest is a wonder of the world. And anybody can take advantage of it—it’s utterly egalitarian. If he does nothing else about his retirement, he should start saving early. He should also save a lot (at least 15% of his earnings) and stay out of debt.
Taking advantage of this sage wisdom does not require an advanced degree or an investment professional. It only takes the following, the first two of which are in remarkably short supply: (1) the brains to know what you’re doing and why; (2) the commitment to keep at it; and (3) time.
That’s it. Want proof? Since I strive always to be data-driven, consider the following. Suppose Ginny opened a Roth IRA at age 19 and for seven straight years she contributed only $2,000 to it (she should save much more, of course) and achieves an average annual return of 10% (that’s perhaps an overly optimistic assumption, I know, despite 2013’s stellar returns, but please make the assumption for the sake of the illustration). Let’s further suppose that after making these seven annual contributions, Ginny doesn’t put another nickel into her Roth IRA.
Now let’s suppose that Bob isn’t as smart as Ginny (an assumption that my kids will readily grant, since it is the name of my wife and their mother) and that he doesn’t open his Roth IRA until age 26 (the age at which Ginny quit making contributions). However, from that point on Bob makes $2,000 contributions each and every year through age 65 and gets the same 10% average return over that time.
Once you do the math, the results seem impossible, even to investment experts.
Ginny, who only made seven contributions ($14,000 total) but started a bit earlier, ends up with more money at age 65 than Bob, who made 40 contributions ($80,000 total) but started later. Bob ends up with $944,641, which isn’t bad for having made contributions totaling $80,000, because he still had nearly 40 years of compounding. But Ginny ends up with $973,704, even though she made far fewer contributions totaling much less.
The key, of course, is that Ginny had seven more early years of compounding than Bob did. Those seven early years were worth more than all of Bob’s 33 additional contributions. Because of time and the magic of compound interest, Ginny’s $14,000 turned into nearly $1 million.
We professionals understand this concept, of course (or we should, anyway). But the societal retirement crisis we currently face and which is the focus of so much effort and attention in columns such as this one could largely be cured if people started saving and investing early. And because compounding works exponentially, the more you save and the earlier you save it provides far more remarkable results than even we who do this for a living tend to appreciate fully.
If we could convey just this message to my grandson and to his generation, we wouldn’t have much of a retirement crisis in the future and we’d have a lot more clients for a lot longer. Everybody would win! As a profession, we need to figure out ways to get the message out about saving and investing early. And for those who haven’t started yet, of whatever age, we need to convince them to start saving or to save more immediately. Time is of the essence.
The second key thing we need to communicate is the importance of staying out of debt. Debt can be crippling for economies and for individuals. The average debt load for the college class of 2012 was $29,400, according to a report released recently by the Institute for College Access & Success’ Project on Student Debt, a nonprofit policy research group, with seven in 10 students in debt at graduation. It will be hard for new graduates—assuming they are employed, since the unemployment rate of young workers (under age 25) is typically around twice as high as the overall unemployment rate—to pay off this debt while saving substantially for retirement and for life.
According to the Fed, consumer debt in this country totals more than $11 trillion (with a “T”). When the lure of consumer debt (buy now, pay later—and keep paying) is factored into the situation of young adults, significant ongoing savings will be nearly impossible to achieve for many.
Our target clients aren’t under 30. That’s not where the money is. But ignoring them and their situations is shortsighted in the extreme. We should want them to become good clients, and the sooner the better.
The best investment management, the best investment products and the best investment advice won’t mean much to and for those who don’t save and invest a lot and early, and who don’t stay out of debt. If we want to improve the prospects for our profession today and going forward, we need to get this message out. If we want to provide real and tangible benefits for society as a whole now and into the future, we need to get this message out. If we simply want to do the right thing, we need to get this message out.
Getting the message out can start with volunteer work at a local school, a client education event or even a seminar for the children and grandchildren of clients going off to college. But start it must. William Joe Cullum, my brand new grandson (and millions more like him), will thank us for it.