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January 27, 2014 at 07:00 PM
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.
Saving Early
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.
