To Save or Not To Save (When You’re Young) That Is The Question
A few years ago a young lady named Lauren Martin gained temporary notoriety by suggesting that twentysomethings shouldn’t be at all concerned about saving for retirement. She reasoned that there would be plenty of time for that and suggested young people should be more concerned with having fun. Having seen her comments, a Marketwatch writer in his early 50s who once held the same views as Ms. Martin admitted to his readers that he felt he was somewhat underfunded in his own retirement. He attributed his unpreparedness to the fact that he really didn’t start saving in earnest until he was around 40 years old and he cautioned potential adherents to Ms. Martin’s philosophy not to waste the time as he did. To buttress his point we offer some quick math below:
If you started working at age 22 and managed to save and invest $3000 a year for the next 43 years, assuming a 7% annual return, you would end up with $826,000 at age 65. (Note $3000 times 43 years equals $129,000, not $826,000. The difference due to the "magic" of compound interest.)If you partied hard for 10 years and started at age 32 instead, you would have $388,000 at age 65. (Note if you wanted to end up in the same place you would have, had you started 10 years earlier, you'd have to save around $6400/year, or more than double the original annual amount.)And if you waited until you were 42, when you finally started to see a gray hair or two, you'd have to save around $14,500 a year to end up in the same place as the 22-year-old you.
We repeat, time is on your side until it isn’t.
A Financial Literacy Link
A basic understanding of financial concepts is highly correlated to financial resilience according to a recent survey published by researchers from three prominent universities. It seems a general grasp of concepts like interest rates, inflation, and diversification is indicative of an individual with more ability to endure hard times financially.
The researchers asked 3000 people between the ages of 45 and 75 the three questions below and determined that those with less financial wherewithal answered about 1.5 of the questions correctly while those with more financial wherewithal answered 2.5 of the questions correctly. Take the quiz for yourself and share it with people you think might benefit from testing their knowledge and doing something about any gaps they might have.
You can check your answers here at the bottom of the article and you can also test your knowledge by trying to answer the 12 other questions contained in the article.
1. Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow?
A. More than $102
B. Exactly $102
C. Less than $102
D. Do not know
E. Refuse to answer
2. Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, how much would you be able to buy with the money in this account?
A. More than today
B. Exactly the same
C. Less than today
D. Do not know
E. Refuse to answer
3. Please tell me whether this statement is true or false. “Buying a single company’s stock usually provides a safer return than a stock mutual fund.”
C. Do not know
D. Refuse to answer
Just A Thought
It has been said that there is no fool like an old fool, except a young fool. But the young fool has first to grow up to be an old fool to realize what a damn fool he was when he was a young fool. - Harold Macmillan