Jason B. Miyashita
Senior vice president, investments
Senior institutional consultant
Asia Pacific Group of Raymond James
Here’s a valuable tip that parents, grandparents, uncles and aunts can convey to a young college graduate who has just landed an exciting new job: First, express your congratulations, then whisper, “Save early for retirement.”
Now, this is unlikely to fit into any young person’s definition of “exciting,” but years from now, when it is time to enter a comfortable retirement, you’ll occupy an honored position in his or her mind.
That is simply because it makes supremely good sense to start saving for retirement during the early years. How much sense?
Consider the case of a 25-year-old who puts $5,000 into a tax-sheltered IRA or 401(k) every year for 10 years ($50,000), then stops. Left untouched, and assuming a 10% annual return, this portfolio will grow to $1.76 million by the time he or she reaches 65.
Later – good, but not better
Now imagine someone at 35 who saves $5,000 a year for 30 years ($150,000). At the same rate of return, he or she will have $904,717 at 65. Good, but only 53% of the total for the saver who started at 25. What’s at work in favor of the early contributor is compound interest. (For a more detailed discussion of compounding, see Financial Journeys for April 2007).
The real trick here is to interest young wage earners in retirement savings. Try hitting these themes:
1) Establish a savings habit before getting married, acquiring a mortgage, having a family and supporting a gas-guzzling sports utility vehicle.
2) Save in a 401(k) or individual retirement account to take advantage of the tax shelter. Consider the Roth versions — you’ll receive no tax benefit now, but you’ll pay no taxes when you withdraw the funds.
3) Start small if need be. Of course, pay off your student loans and other lingering debt, but when those expenses decrease, add that freed money to your retirement savings.
4) Set up an automatic payroll deduction, savings or transfer plan if possible. It’s far easier to save money you’ve never seen.
To be sure, retirement may seem as remote as the moon to someone in his or her early- to mid-20s who has just landed a dream job. And perhaps saving $416.66 every month — to reach the $5,000 example quoted above — isn’t possible. What’s important is to start saving early, to contribute regularly to a tax-sheltered investment, to take the long-range view that every step you take influences the structure of the rest of your life.
The hypothetical examples illustrate the advantages of tax deferral and are not indicative of any security’s performance. Expenses have not been included in the examples. They will affect performance. Any withdrawals may be subject to income taxes, and prior to age 59 1/2 a 10% federal penalty tax may also apply.
— Stay tuned to the next issue of Guam Business Magazine for “Retirement, stage two: It’s time — Realize your dreams and start living them.”