The Clock is Ticking

All of us know that it’s important to save money. It’s common sense, right? So why are we terrible when it comes to saving money? The reality is that it’s hard for a lot of people to save money. It doesn’t come natural, and for most people, there’s too much month left at the end of their money. Most people feel they have just enough money to pay their bills and don’t have anything extra to invest. We also live in a consumption based society and have a constant stream of advertisements from television or social media. The latter has completely disrupted our society in that we only see the very best aspects of our friends’ or acquaintances’ lives on social media. We see them eating at restaurants or on a cruise or some other exciting vacation and it’s really easy to feel a bit envious. We may wind up feeling that our lives aren’t very fulfilling and we spend money to keep up with the Jones’ and feel better about ourselves. However, almost 50% of people are living paycheck to paycheck. The wonderful lives portrayed on the surface on social media may look very different when viewed through a financial lens, eclipsed by stress and anxiety.

Having success with money is not about being smarter than another person. There are plenty of geniuses walking around that are flat out broke. Being successful with money is behavioral. It’s about telling your money where to go instead of wondering where it went. It’s about developing a financial plan and sticking to it. It’s not about some get rich quick scheme or winning the lottery. 70% of lottery winners are bankrupt within a few years. What we’re talking about is like crockpot cooking – slow and steady. Saving a portion of every paycheck and investing a portion of every paycheck. People who have success with money follow a game plan, saving and investing during their entire working lives.

The reality is nearly 42% of Americans will retire broke. In the 1980’s nearly 60% of companies offered pensions. Today, only about 4% of companies offer defined benefit plans such as a pension. Most companies today do offer some type of defined contribution plan, such as a 401(k), but they require you to put in your own money and many offer only a 2% or 3% match on contributions. Social Security is absolutely crucial in providing some economic security for seniors, but it was never intended to provide for your retirement. It was designed as a retirement supplement, not as a source of primary income.

The U.S Census Bureau uses the Supplemental Poverty Measure (SPM) to measure poverty in the United States. The SPM takes into account many of the government programs that are designed to assist low income families such as financial resources, taxes, benefits like food stamps, and out of pocket medical spending. As of the latest data collected, 14.5% of seniors are living in poverty. 50% of all people on Medicare had incomes less than $26,200! As you age, your standard of living will be entirely dependent on what you save and invest during your working lifetime.  Yet only 43% of American workers contribute to a 401(k) Plan and nearly half of those workers have saved less than $10,000.

Realize that the person you see in the mirror is entirely responsible for your future success or failure. Is that person holding you back? If that person was the CFO (Chief Financial Officer) of your company (household), would you fire that person? Uh oh! You may be firing yourself! But it’s not too late to change course. Just know that the sooner you start, the better off you’ll be. This is illustrated in the example below.

Take a look at the chart. Notice how both Jimmy and John make payments totaling $5,500 per year. The reason I chose this number is because it’s the maximum amount that can be contributed to an IRA (Individual Retirement Arrangement) in the current year. They both chose an investment fund inside an IRA and this fund does ridiculously well, earning an annual return of 12% per year. Jimmy at age 24, graduates from college, enters the workforce and realizes how important it is to start saving for retirement. So he immediately begins to contribute $5,500 per year to an IRA. He does this for six years and stops at age 29. He doesn’t add another dime to this IRA over the course of his working life. Overall, Jimmy contributed $33,000 to his IRA.

John, on the other hand, also graduates from college at age 24. He enters the workforce and instead of saving for retirement, he chooses to spend his money on consumption. He feels that life is too short. He works hard and he’s going to have some fun. Besides, he’s young and there’s plenty of time to save for retirement, right? When he turns 30, he realizes that he needs to get his butt in gear so he opens his IRA and begins contributing $5,500 per year. He becomes extremely diligent about his retirement savings and contributes this amount every year for 33 years until he retires at age 62. Overall, John contributed $181,500 to his IRA.

So, Jimmy contributes $33,000 to his IRA and John contributes $181,500 to his IRA. When Jimmy and John both retire at age 62, John obviously must have a ton more money than Jimmy, right?  After all, he saved $148,500 more that Jimmy during his career. Look again. Jimmy ended his career with $2,104,137 to John’s $2,109,365. A difference of only $5,228! Even though Jimmy only contributed $33,000, he started six years earlier. John had to contribute an additional $148,500 over the course of the rest of his career just to catch up with Jimmy.

Now this is a very primitive example that implies a level 12% rate of return compounded annually and there is no guarantee that you will receive a 12% rate of return on the investment of your choice in the future. I get that. I also understand that this example is about two twenty-something year olds. Am I implying that if you’re in your forties, fifties or sixties, it’s too late for you to start saving money? Of course not! It’s never too late. Colonel Sanders did not franchise his secret recipe until he was 62 years old. Ben Franklin didn’t invent the bifocal until he was 78 and Grandma Moses didn’t sell a painting until she was in her 80’s. The point is, it’s never too late to start! This example is intended to display the effects of procrastination and the power of compound interest. Time is our greatest resource and every day that goes by we lose a little more of it.  Don’t delay, ACT Now!

“There are risks and costs to any program of action, but they are far less than the long range plan of comfortable inaction.”

– John F. Kennedy