I remember an old cartoon in The New Yorker: An older middle-aged man sitting in his armchair is saying to his spouse, "You wish we were rich? You should have mentioned that to me 40 years ago." The point, of course, is that it's easy to accumulate assets if you start early in life. To avoid having youth being wasted on their young, parents might consider sharing the following:
Every young person new to the job market who has an opportunity to contribute to a 401(k) or 403(b) retirement program should be given whatever boost is necessary to encourage them to participate in a substantial way -- even if it means suggesting that they live at home rent-free.
There's a simple reason for why this step could be life changing for an entire family. If someone can find a way to contribute $10,000 per year into a 401(k) for five years, they would have $1.6 million in their account by the time they reached 65 -- even if they never contributed another dime!
Do the math yourself. Money earning 10 percent per year doubles every 7.2 years. By age 65, about the time today's young adult will be helping to take care of aging parents, he or she will have watched the original $50,000 double five successive times to reach a seven-figure foundation of financial security.
While $10,000 per year may appear to be a daunting challenge to many, it can cost substantially less in take-home pay. First off, there could be a company matching contribution. Many young people are clueless as to the value of these plans and just blow them off. Pay attention to what is being offered. If the company offers a dollar-for-dollar match on, say, the first 4 percent of pay contributed to the plan, a young person making $40,000 can contribute $1,600 and get an equal amount from the company, thus doubling what they're putting into the plan. Beyond that, an additional $6,800 (to get to our goal of $10,000) will cost the average single person about $4,700 in take-home pay, because $2,100 of the $6,800 is money that otherwise would have been paid in taxes. (The initial $1,600 costs just $1,100 in take-home pay.)
So, in this example, the final cost in take-home pay for the $10,000 is $5,800 or about $500 per month. Where can you get $500 per month? Start by making your own coffee and lunch to save $3,000 per year right there. Then consider giving up cable and watch TV over the Internet for $100 more per month of savings. Rent cars from Zipcar instead of owning one. Be creative.
Parents should step up to the plate and consider making a deal with children who have moved back home. Forget about asking for rent, but insist that what would have been spent on apartment rent is invested in a retirement plan.
Beyond the points made thus far, there is much to be said for making the sacrifice to generate a meaningful nest egg early in life. Someone in their early 30s with $50,000 can enjoy the smug satisfaction of being financially secure for life. The "hook has been set" and the habit of saving that $500 per month will compound to roughly $3 million by age 68 -- a future normal retirement age. Moreover, we can add to it the $1.6 million that is the compound result of the initial $50,000. All told, it's a cool $4.6 million.
Compare the more common alternative, which is someone who waits until age 40 to get started in any meaningful way. Their $500 per month will compound to only $1 million by age 68. Anyone can conclude from this comparison that there is no substitute for being an "early adapter" (to lapse into the jargon of the young). Parents should lean on their young adult children to get the retirement ball rolling -- especially if they've missed the boat themselves.
Stephen J. Butler is CEO of Pension Dynamics. Contact him at email@example.com or 925-956-0505, ext. 228.