Now that things are getting a little closer to normal, I have had a little more time to ponder as I go about my day. I was getting my customary workout in at the gym, and I stumbled on this sign.
"If you can't give 100% to your Health and Wellness... Its OK... They will add interest to your medical bills. Pay Now or Pay Later!"
I chuckled a little, and kind of went on with my workout. As I was working out, it finally struck me how applicable this kind of thinking is to many other areas of life. In my mind I started substituting the health and wellnes words for retirement, and suddenly a lightbulb went off. So many times I meet with clients and they ask, "did we do a good enough job of saving for retirement?" It certainly is a valid question, but in the end, not a particularly helpful or informative one. The bigger question is how much is your retirement going to cost?
You see just like the sign in the gym implies, we are all going to get a bill for our retirement. The question is do you want to pay the lowest bill, or the highest. Some simple behaviors early in your career can determine which situation you will be faced with.
Saving Early Vs Saving more...Many of us have seen the caluclation about putting money away when you are younger vs. waiting for "the right time to invest". But until you look at it from the cost perspective, it doesn't really hit home. The graphic below shows the outcome of saving $5,000 a year for 25 years with an average 7% rate of return. It also shows that if you wait 10 years how much less you will have. But see that is not really the whole story. Lets do the math for the person who started right away. That is 25 Years times $5,000 per year.... That is $125,000 to get to that result. That is the "Cost" for getting to the roughly $365K outcome. So the real question is... what does it cost the person who waits 10 years? Because we alll need to retire, so the option typically isn't doing it with less money. When we look at that... the options are not really that great. We either have to start with about $42,500 instead of our first investment of 5K, or we have start doing $11,250 per year to make up the shortfall.
So the results are in... to get to the exact same place you have to save $11,250 over 15 years... That is $43,750 in additional cost to fund your goal. You might think that this is just a pitch to try to get you to invest more, but really there is more to it than that...
We all monitor our money flow month to month. Five thousand a year looks like $416 per month, a car payment for many households from a budgeting perspective. The 11K number breaks down to $937, more on the scale of a mortgage payment... So you have to ask, when waiting can you afford a second mortgage payment to fund retirement 10 years in your future.What things will you have to give up to start to focus on this goal? Will you have to say no to travel and great vacations for your family? Will funding college soley become your childs problem? Summer camp, sports teams, trips to the movies, or even a ball game might all be decisions you have to wrestle with. When a household faces the reality of having to change things on this scale, its not a fun. No one wants to feel like they are moving backward!
We are not going to get into the discussion of what kind of account to use and taxes. Those are really personal conversations that need to happen in a one on one planning meeting. But I do want to make the point, especially for people just starting out in life, that starting early actually reduces your cost! The bill for your retirement will actually be lower, and that is something you can control direclty. So as you read this, I want you to think about the people in your life that you care about. Even the ones that complain that they never get a fair shake, and consider fowarding this article. If we can get them to think in terms of cost, suddenly putting a long tern stategy together is a no brainer.