When I write on this blog, I’m generally directing my comments to former students. I know that others might read from time to time (hi, Mom), but if you don’t fit into the category of a 20-something TMCish grad with no life and this blog doesn’t seem relevant to you, I know why.
But with the passage of time, it’s possible that one thing about my readers is changing: they are getting a life. By this I mean that they are no longer sheltered in a Christian cocoon and eating Top Ramen which they bought with the last 39 cents in their pocket. Some of these students (not necessarily the ones reading this blog) are now bankers, lawyers, and real estate agents. And many others are past Top Ramen days, in a wide range of places. All of this is a rather long intro to explain why I am now dispensing Investment Advice.
This was prompted by a Washington Post editorial today. It’s short and recommended reading. Here are some tips from me:
1. If you’re out of school and working, you should be putting money into a retirement account. Even before paying off school loans or many other good things.
2. If you have any notion that Social Security will ever give you a penny, you’re completely out of touch with reality. In addition to the money that SS takes from you (7.5 or 15%), you must save elsewhere.
3. It’s not a bad idea to save in multiple places. If your employer matches your retirement savings, put the maximum amount that is matched (sometimes it’s a 50% match, sometimes up to 100%, up to a certain percentage of your salary). This is absolutely the best investment you’ll ever make as you get 50-100% “interest” immediately. Do this even if it means you’re back to eating Top Ramen.
4. It’s also a good idea to save in a Roth IRA. The “Roth” part means that you put the money in “after taxes,” and taxes for many of you poor people isn’t much. The beauty is that you never pay taxes on that money again. So when you’re a millionaire when you retire, you get to draw all of that account with its compounded interest without paying taxes on it. Another advantage of a dedicated retirement account is that it’s harder to take money from it for other purposes.
5. If you think that because you’re young, you don’t need to think about retirement, you are wrong. In fact, saving a little now is much better than saving a lot later. That’s because of something called “compound interest.” Here’s an example. Let’s say you put the maximum of $4,000 into a Roth IRA this year (or better last, since you can still do that until April 15). Assume 12% interest, which I think you can easily beat in the long run if you diversify across several higher-growth mutual funds. The Rule of 72 quickly tells you that that will double in 6 years (72/12=6). In 30 years, your $4,000 will be $128,000. If you wait ten years to start saving for retirement, you’ll have to put about $15k in the bank to get the same results. And in 10 years, you’ll probably have more kids and more things to take your money away. The younger you are, the easier it is, usually.
Maybe this advice sounds strange to you. I remember that the constant messages I heard in college were usually about growing in holiness or serving overseas. Those are good. But I think that one possible downside to a TMC-type education is that you may not think shrewdly about what lies ahead. If the Lord is giving you a certain amount of his money now, I think that he would want you to invest it wisely. In fact, he gave a few parables about this during his earthly ministry. I’m not suggesting that you not give generously now, but I am suggesting that you plan ahead wisely so that when you’re old you can give generously. And eat.
Where do you start? I have an account with Schwab, but there are plenty of other investment places. Do not put your retirement money in a regular bank account or in 30 years, that $4,000 will be worth $4,003. Which, in 2038, might buy a tank of gas.
Todd, I’m happy to say I started my Roth last year at age 21, and within the next six months hope to have a permanent job through which I will contribute to a employer-matching retirement fund!
Thanks for the extremely pertinent exhortation to start saving now for retirement. Too often we “young people” put it off because retirement seems so distant, but earlier is better, especially when we’re privy to extremely compelling calculations illustrating the beauty of compounding interest! Once my dad showed me that, I was eager to start saving NOW.
A good rule of thumb for just starting out is to live off 80% of your income. Give 10%, and save 10%. This of course can and should change as you get older (hopefully for the better). Many people don’t start even thinking about retirement before 30, so anything you save before that really puts you a head of the game.
Good post Todd…. Where are you getting 12% interest?
Paul – I think that many people can live on less than 80%, especially when they’re young and don’t have children (or have young children). I wouldn’t want to encourage people to think that 10% is enough to give or 10% is enough to save. If you can save 30% at this period of your life, do.
A few funds that have averaged 12% or more over the last 10 years or since founding include UMBIX, MPYMX, EUROX, NOSGX, QUAGX, RYLPX, SWHFX, SWOIX, and PSPFX. That’s not using absolute latest data (I’m not going to take the time to look it up), but that’ll give some ideas.