My kids are members of Gen Y. They are 26, 25 and 21, and I am exceedingly proud of each of them.
Here is my best single piece of investment advice to them and to every member of Gen Y: 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 you do nothing else about your retirement, start saving early. You should also save a lot (at least 15 percent) and stay out of debt, but I promised to stick to one.
Here’s all you need to take advantage of this sage wisdom:
- The brains to know what you’re doing and why;
- The commitment to keep at it; and
Want proof ? Since I strive always to be data-driven, here you go….
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 achieved an average annual return of 10 percent (that’s very high for today’s markets, I know, 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) 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 percent average return over that time.
Once you do the math, the results seem impossible.
Ginny, who only made seven contributions ($14,000 total) but started earlier, ends up with more money at age 65 than Bob, who made 40 contributions ($80,000 total) but started later. Bob ended up with $944,641, which isn’t bad for having made contributions totalling $80,000. But Ginny ended up with $973,704, even though she made far fewer contributions totalling 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.
If you don’t trust my math, you can do it yourself here.
If you take no other advice that I offer about saving and investing, please start early. And whatever age you are, get started saving or save more immediately. Please. Time is of the essence.